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COMINGSOON

4

CONTENTS

Editor-in-ChiefProfessor Humayon DarPhD, Cambridge University

International Editorial BoardDr. Mehmet Asutay Durham University

Dato’ Dr. Asyraf Wajdi DusukiYayasan Dakwah Islamiah MalaysiaDr. Mian Farooq HaqState Bank of PakistanMoinuddin MalimAlternative International Management Services

Professor Kabir HassanUniversity of New OrleansDatuk Noripah KamsoIslamic Finance ExpertDr. Asmadi Mohamed NaimUniversity Utara Malaysia

Professor Joseph FalzonUniversity of MaltaM. Saleem Ahmed Ranjha Wan Miana Rural Development ProgrammeProfessor Muhamad Rahimi OsmanUniversity Teknologi MARA Dr. Usamah Ahmed UthmanKing Fahd University of Petroleum & Minerals

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Executive StaffZia Ullah ZiaKhuram Shehzad Usaid Hasan

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Talking PoinTs

06 Principles of an Islamic Financial System

Patrick Mahdi O’Neill

18 Band of Brothers

Professor Humayon Dar

26 Do Young Muslims Subscribe to Islamic Finance Products

DrSofizaAzmi

43 Islamic Exchange Trade Funds (ETF) - A Financial Innovation

Dr.NafisAlam

46 Specific Risks Facing Banks and Financial Institutions (IBIFs)

Yousuf Siddiqui

52 Financial Reporting for Islamic Financial Institutions in Malaysia: Issues and Challenges

Mezbah Uddin & Romzie Rosman

PersonaliTy

45 Roslina Abdul Rahman

Managing Director, Amundi Malaysia Sdn Bhd

inTerviews

12 Hasan Shakib Al-Jabri

CEO, Sedco Capital

38 Mohd Razlan Mohamed

CEO of Malaysian Rating Corporation Berhad (MARC)

isfire rePorT

30 Challenges & Opportunities in Islamic Finance Education

Pause for ThoughT

50 Lahore as a Global Centre of Excellence for Islamic Finance?


ISLAMIC FINANCE REVIEW | WWW.ISFIRE.ORG

VOLUME 5 - ISSUE 1 | MARCH 2015

ISSN 2049 - 1905

5

From the EDITOR

FROM THE EDITOR

ISFIREcelebratessuccessstoriesinIslamicbankingandfinance(IBF).Thisquarter’ssuccessstoryistold through an extensive interview of Hasan Al Jabri, CEO of SEDCO Capital. This follows some very distinguished cover stories shared with our readers in the last three years. The most notable of the cover stories in 2014 was that of His Excellency Dato’ Seri Najib Razak, Prime Minister of Malaysia, whose government continues to play a lead role in the global developments in IBF. Hasan Al Jabri’s story is equally inspiring, as he led a team of asset managers based in Saudi Arabia to bring the social responsibility concerns to the forefront of Islamic asset management on a global level.

Social responsibility is a focus of policy debate all over the world. Sooner or later, IBF will have to embraceittomaintainitsrelevancetothemasses.TheprofitabilityofIslamicfinancialinstitutionsisonarise,andwithititscommitmenttosocialresponsibilitymustbefirmedup.Pharmaceuticalfirmsaroundtheworld,whilebeingimmenselyprofitable,arenowcommittingthemselvestopatientassistanceprogrammes by way of offering free or discounted access to medicine to those who otherwise cannot affordtopayforcostlymedicaltreatment.Islamicbanksandfinancialinstitutionswillhavetograduallyshowtheircommitmenttothefinanciallyexcluded–thosewhoeitherhavenoaccesstofinancialservicesor cannot afford to pay for such an access.

Withoutcommittingtosocialresponsibility,Islamicbanksandfinancialinstitutionswillfinditdifficulttoappealanewgenerationoftheusersoffinancialservices,whoareincreasinglybecomingawareofandcommittedtosocialissues.DrSofizaAzmi’sarticlehighlightsthisnewtrend.ShepointsoutthatonlyafractionoftheGen-YusesIslamicfinancialservicesbeyondthebasicproductslikecurrentaccounts.Islamic banks can make further inroads into the younger generations by offering the services consistent withamodernfinanciallifestyle.

Corporate governance in IBF is the focus of an article contributed by Mezbah Uddin and Romzie Rosman.FinancialreportinginthecontextofMalaysianIslamicfinancialservicesindustryshouldbeofinterest to the regulators who are looking into developing similar regimes in their respective countries.

A unique feature on ownership and control in IBF is included in this issue. It looks into the shareholdings of some of the major players in IBF to detect any hidden agenda or non-business motives of the promoters. The readers will observe that IBF is a purely business phenomenon, with shareholders driven byprofitmotiveasmuchastheirconventionalcounterparts.SomeoftheleadingpersonalitiesinIBFarealso mentioned in this context.

We have Roslina Abdul Rahman, CEO of Amundi Islamic Malaysia Sdn Bhd, as our featured personality under our regular Personality interview. A detailed interview of Mohd Razlan Mohamed, CEO of MARC, is included to give an insight into the company that won a Global Islamic Finance Award as the best Islamic rating agency in Dubai last year. So big is the success story of MARC that we decided to interview the man who has been behind the recent success of a global Islamic rating agency.

Inthisissue,wealsofocusonIslamicfinancialeducation.Acomprehensivereportisincludedtohighlightchallenges and opportunities in development of human resources and nurturing talent in IBF.

In Pause for Thought, I have argued for developing Lahore as a centre of excellence for IBF. This is followed by my participation in the third Global Forum on Islamic Finance, organised by COMSATS Institute of Information Technology Lahore on March 11-12, 2015. Lahore certainly deserves attention oftheglobalIslamicfinancialservicesindustry,andsoisAlmatywhereweareholdingourfifthGlobalIslamic Finance Awards at the end of September this year.

Patrick Mahdi O’Neil continues with his two-part analysis of the monetary system based on debt-based moneycreation,withaviewtosuggestanIslamicsolution.DrNafisAlamisournewcontributorwhohaswritten on exchange traded funds.

ThereaderswillobservethatthisissueofISFIREhasimprovedsignificantlyintermsofdesignand format. This is due to the collective efforts of Edbiz team, especially Fahad Alvi who has spent considerably more time in improving the outlook of the magazine. I am thankful to the entire team and all the contributors who have made ISFIRE as number one publication in IBF. From this issue, ISFIRE has becomeofficialpublicationofIslamicBankersAssociation–aLondon-basedbodyrepresentinginterestsof the global community of Islamic bankers and associated professionals.

Professor Humayon Dar, PhD (Cam-bridge) Editor-in-Chief

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TALKING POINTS

To know the light, we must also see the darkness. In part 1 (ISFIRE Nov 2014 Issue) we have already taken a look at how the darkness ofthecurrentfinancialsystemhasenvelopedthe world and enslaved most of mankind to unending debt and interest repayments. The result is debt mountains piled upon debt mountainscreatedoutofnothinginflictinginterest compounding without mercy stealing purchasing power and appropriating the wealth and resources of mankind to enrich the globaleliteofourfinancialsystem.Inthe2nd part,wetakealookathowafinancialsystemrooted in the principles of Islam and adheres totheShari’aoffersafinancialsystemwhichisbeneficialandmercytoallofmankind.

Islam is a mercy from Allah. So it follows a financialsystembasedonIslamicprincipleswill be a mercy for all mankind. The philosophy, outlookandorientationofanIslamicfinancialsystemareincompletecontrasttothefinancialsystem we know and govern our lives today. It requires a complete shift in our thinking, attitude and relationship with money and wealth.

Let’s start at the beginning! For Muslims, the meaning of life is no great mystery. Allah (SWT),

says in the holy Quran “I have only created Jinns and men, that they may worship (or serve) Me”. (Surah 51 Al-Dhariyat) For the believer, this life and all its possessions and wealth are but a test. This life is very short andfleeting.Allah(SWT)saidinSurah57AL-Hadid Verse 20:

“Know that the life of this world is only play and amusement, pomp and mutual boasting among you, and rivalry in respect of wealth and children, as the likeness of vegetation after rain, thereof the growth is pleasing to the tiller; Afterwards it dries up and you see it turning yellow; then it Becomes straw. But in the Hereafter (there is both), a severe Torment (For the disbelievers, evil doers), and Forgiveness from Allah and (His) Good Pleasure (for the believers, good doers), whereas the life of the world is only a deceiving enjoyment.”

For those who have been given great wealth, itisbothagreatblessingandbenefittobegrateful to Allah, but also a test as they will have

toaccountfortheirwealthinthenextlife–howyou earned it and spent it. For those with little wealth,itisalsoatest–willoneacceptwhatAllah has bestowed with patience (sabir) and without complaining. “Be sure We shall test you with something of fear and hunger, some loss in goods, lives and the fruits (of your toil), but give glad tidings to those who patiently persevere. (155) Who say: when afflicted with calamity: “To Allah we belong and to Him is our return.” (156) They are those on whom (descend) blessings from their Lord and Mercy and they are the ones that receive guidance”. (Surah 2 Al-Baqara)

Allah (SWT), is the owner of all wealth “To Him belongs what is in the heavens and on earth, and all between them, and all beneath the soil.” (Surah 20 Ta-Ha) There are 2 dimensions to this. Firstly, we recognise and believe that whatever wealth we have is by the will of Allah. Secondly, no matter how wealthy you are, you only possess your wealth for as long as the lifespan Allah has written for you. After you die, your wealth will be passed on to somebody else. Even on our

In the Name of Allah, the Merciful, the Compassionate

Principles of an Islamic Financial SystemPatrick Mahdi O’NeillIndependent Financial Adviser

7

ISLAMIC FINANCE REVIEW | WWW.ISFIRE.ORGTALKING POINTS

death, believers cannot will their estate (except aportion)astheywish–itisstipulatedintheShari’a how one’s estate should be distributed.

Another very important concept in Islam is balance and moderation in all aspects of our lives. Our material pursuits should be balanced with our spiritual needs. Individual’s needs should be weighed against society’s needs. Wearefreetopursueprofitandseektoincrease our wealth, but it should not come at the expense of our worship and duties to our Creator. Our pursuit of personal gain, should not come at the expense of society, nor the detriment of the environment, or impinge on the rights of anyone else.

Allah (SWT) says “Those who, when they spend, are not extravagant and not niggardly, but hold a just balance between those (extremes)” (Surah 25 Al-Furqan)

Who was the best person who embodied the teachings of Islam and set the best example in both actions and words for us to follow? This of course was our beloved Prophet Muhammad (Peace be Upon Him). In a beautiful hadith (reported saying) “None of you (truly) believes until he loves for his brother what he loves for himself.” (Al-Bukhari and Muslim). In another saying ‘He who sleeps on a full stomach whilst his neighbour goes hungry is not one of us’ (Bukhari). Care, compassion and mercy for others are part of our religion and are a duty incumbent upon the Muslims. Imagine if our business dealings, trade and investments reflectedtheseideals–ourworldtrulywouldbe a more prosperous, kind and happy place for all.

WhilstanIslamicfinancialsystemisbuiltonthe foundations of values and beliefs, it must alsohavespecificrulingsanddetailedguidanceto enable us to achieve a system which meets theobjectivesoftheShari’aandfulfilsourroleand duties as trustees of our planet and all the resources and wealth Allah has provided for us.

The best known of these injunctions is the prohibition of Riba, which literally means excess, increase or addition. There are different types or categories of Riba, but the most prevalent and widespread type of Riba practiced in our world today is the charging of interest, which is what this article will focus on.Interestcanbedefinedasthechargeforborrowing money, typically expressed as an annual percentage rate i.e. if you borrow money, you have to pay the principal back plus anadditionalamountofmoney–theadditionalamount or increase is interest.

Today in our modern world, interest by most is viewed as a very normal part of life. The prices of assets, evaluation of investments and projects, lending and even Islamic banking are all effected by interest rates. You could almost say the interest rate is considered to be a ‘universal law of money’. Even many western writers who are very eloquent in their criticism ofdifferentaspectsofthefinancialsystemwillrarely talk about interest as being the root of the problem. Of course this was not always the case. For most of human history, the charging of interest was universally despised by most societies and religions. For example, in England in the 13th century, usury was illegal and linked to blasphemy. In this period, those guilty of usury, had their assets seized. This included 300 English Jews who were hanged and had theirpropertyconfiscated.Aristotle(384–322 BC) the Greek philosopher and one of the fathers of Western thought, wrote about lending of money at interest;

“The most hated sort, and with the greatest reason, is usury, which makes a gain out of money itself, and not from the natural object of it. For money was intended to be used in exchange, but not to increase at interest. And this term interest, which means the birth of money from money, is applied to the breeding of money because the offspring resembles the parent. Wherefore of a mode of getting wealth this is the most unnatural”.

So the prohibition and condemnation of Riba or the charging of interest in the Quran is not new. The verses in the holy Quran use strong and dramatic language to leave no doubt regarding the serious nature of Riba, its prohibition and utter condemnation. In Surah Al-Baqara, Allah (SWT) says;

“Those who devour usury will not stand except as stands one whom the Evil One by his touch hath driven to madness. That is because they say: “Trade is like usury,” but Allah hath permitted trade and forbidden usury. Those who after receiving direction from their Lord, desist, shall be pardoned for the past; their case is for Allah (to judge); but those who repeat (the offence) are companions of the Fire: they will abide therein (for ever). (Surah 2 Al-Baqara)

For those who persist in demanding interest, they are given a very bleak warning from Allah;

“O ye who believe! Fear Allah and give up what remains of your demand for

usury, if ye are indeed believers. (278) If ye do it not, take notice of war from Allah and His Messenger: but if ye repent ye shall have your capital sums; deal not unjustly and ye shall not be dealt with unjustly” (Surah 2 Al-Baqara)

And it is not just the one who charges interest thathastoworry–itisaserioussinforallparties involved in Riba dealings. In a hadith of our Prophet (PBUH) said, “Allah has cursed the one who consumes Riba (interest), the one who gives it, the one who records it and the witnesses.” He said: “they are all the same” (Sahih Muslim)

Moving on from the charging of interest itself, I believe the next important step is to look at the support structures of our Riba or interest basedfinancialsystem.InterestderivesfromDebt. Debt is manufactured by our banking system via Fractional Reserve Banking (FRB) and most of our Fiat Money comes into existence as interest bearing bank debt. This relationship is summarised in the diagram below.

Remember the vast majority of our interest bearing debt has been manufactured by banks out of nothing via FRB which typically accounts for97%ofourfiatmoneysupply.

Amongst the vast majority of the ulema (scholars) and people there is almost unanimous agreement that all forms of interest constitute Riba. What is less clear and certainly much less discussed is the position regarding FRB and Fiat Currency. Of course both of these monetary phenomena did not exist at the time of the Prophet (PBUH) or for most of the existence of the Islamic Empires/Era. FRB did notevolveorganicallyinMuslimlands–ithasbeen imposed via the former colonial powers.

I am not a Shari’a expert, so I will not get entangled in a debate about the Shari’a compliance or not of FRB and Fiat Currency. However, I will certainly argue that they go against the maqasid (objectives) of Shari’a. Please refer to part 1 where I give a comprehensivecritiqueofthefinancialsystem–Iwillnotrepeatallthecriticismshere,butl will just focus on one key aspect which is inflation.

When you increase the supply of something, all other things being equal you reduce its price or value. So it is with money. Via FRB the money supply is dramatically increased. Fiat money (especially the electronic version), because it has no real value can be produced endlessly at almostnocost.However,thoughfiatmoneyhas no real value you can buy real things with it. So essentially the banking system can produce something of no real value with little or no cost

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ISLAMIC FINANCE REVIEW | MARCH 2015 TALKING POINTS

and via interest repayments acquire money for nothing which entitles them of course to acquire real wealth. FRB and Fiat Currency are a deadly duo working in tandem to increase the money supply/debt levels which is therefore constantly eroding the value of money.

Simply,nowoneneedstoaskwhobenefitsthemostandwhosuffersthemostfrominflation?The poor in society and those on low incomes are the most badly affected. Their cost of living is constantly on the increase and many are forced into high interest debts, just to survive. Wealthybusinessownersandinvestorsbenefitthe most. As prices go up, the prices of the goods and services they provide increase which increasestheirprofitsandbusinessvalue.Overthe long term, asset prices such as property, stock markets and commodities have increased dramatically. Such a system that favours the rich and penalises the poor certainly does not fulfilthemaqasidal-Shari’a.

Some argue in favour of debt, because it allows individuals, businesses and government to spend more (whether for investment or consumption). One person’s expenditure is another person’s income. Thus allowing and increasing debt increases income, wealth and overall economic growth. This narrative paints a very attractive and compelling case for debt.However,itisafalsepromise–yougetashorttermboost,butatthesacrificeoffutureexpenditure as debt and interest have to be repaid. This exponential growth in our debt has beencausedbyourmanmadefinancialsystem.The result is the world crushed by an inverted pyramid of debt. As the debt pile accelerates, increasing amounts of income are required to service it, thus continuously reducing the ability of those in debt to repay. Even with near zero or negative real interest rates much of the world

is straining under its debt burdens. A major debt crisis or default will have a domino effect causing more defaults leading to systemic crisis inourfinancialsystem.Inevitably,theglobalfinancialsystemwilleventuallycollapseunderthe weight of its debts. Just global government debt alone is now over $55 Trillion. To give this colossalfiguremoremeaning,let’slookattheper capita debt of some of the key countries. The public debt per head of population (for every man, woman and child) in USD (source: The Economist):

• USA $46,214

• UK $41,929

• Japan $97,450

This is only public debt. Counting private and public debt, ING estimate total world’s debt at an astounding $223.3 trillion! This amounts to 313% of global gross domestic product.

Many advocate returning to money which has an intrinsic value or at least backed by something of intrinsic value. Traditionally, throughout most of human monetary history this has been gold and silver. Al-Qaadhi Abu Bakar Ibn Al-Arabi, (Ahkaamul Quran, 3/1064) definedmoney“(The gold dinar & silver dirham) is the medium to measure the value of things ... they are the judge in measuring and determining the value of wealth when there are differences in quantity or when the value of the thing is unknown.”

“Money power is the greatest power … in the whole world. It is the power to give and the power to take away, the power to destroy and the power to create, the power to crush opposition or bestow favours” (The Money Trick, by

the Institute of Democracy). By allowing FRB and Fiat Currency to exist we give this power to Central Banks, World Banks, and Commercial Banks. Governments legislate to facilitate and cooperatebecauseintheshortruntheybenefitfrom easy money via quantitative easing i.e. money printing or more correctly loading up more national debt. Money which has intrinsic value or at least backed by such, will take this power away. Interestingly, Personal Income Tax was introduced in US in 1913 the same year astheformationoftheUSFederalReserve–coincidence or collusion between government and banking!

For further reading on this critical subject matter I would also like to refer the reader to a paper by Dr. Ahamed Kameel Mydin Meera and Dr Moussa Larbani (both Professors at International Islamic University Malaysia) “Ownership Effects of Fractional Reserve Banking: An Islamic Perspective”. In great detail they tackle the issues of FRB and Fiat Currency from an Islamic perspective. They assert that FRB “….violates the ownership principle in Islam while inflicting profound injustice on the economy and society”. They further argue that “…money creation through FRB is creation of purchasing power out of nothing which brings about unjust ownership transfers of assets in the economy, to the bank effectively, paid for by the whole economy through inflation. This transfer of ownership is not based on human effort by taking on legitimate risks… They conclude “…. that FRB has elements of riba that goes against the maqasid al-Shari’ah; and therefore can be termed illegal or haram from Islamic perspective”.

The next major prohibition is gambling. In Arabic, it is referred to by Maysir which is the acquisition of wealth by chance instead of by effort and Qimar which refers to a game of chance. Allah (SWT) says in the holy Quran;

“O who you believe! Intoxicants (e.g. alcohol) and gambling and idols and (lottery by) arrows are an abomination of Satan’s work, so avoid them so that you may get salvation. Satan’s only desire is to create among you enmity and hatred by means of intoxicants and gambling and stop you from praying and remembering Allah. Will you not then stop?” (Surah 5 Ma’idah)

Gambling is a huge and lucrative industry. Forbes estimated the global market to be worth $417 billion in 2012 - and this just

I N T E R E S T

DEBIT

BANKING=

FRB

MONEY=

FLAT CURRENCY

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represents ‘legal’ gambling. Black market gamblingishuge–justillegalsportsbettingin Hong Kong alone generates about $64.5 Billion each year. Sports match-betting industry (legal & illegal) is worth anywhere between $700bn and $1tn a year. The world’s biggest market is the U.S., which accounts for 25% of theworld’sgamblingprofits.Chinaisthe2ndbiggest market, but counting illegal gambling it is estimated to be 1.5 to 2 times as large as the U.S.Inmanycountriesupto70to80%oftheadult population participate in some form of gambling.

Obviously from an Islamic perspective there is no distinction between legal and illegal gambling–whethersanctionedbyastateor not all gambling is an abomination. The temptation for many states or governments to legalise gambling is often too much as they can earn huge revenues from taxing it. Of course many public servants have argued and struggled against legalising gambling. The late governor of New York Thomas E. Dewey declared “The entire history of legalized gambling in this country and abroad shows that it has brought nothing but poverty, crime and corruption, demoralization of moral standards, and ultimately lower living standards and misery for all the people.” However, the lure of easy money though it is built on the misery and despair of others has in most cases triumphed over these arguments.

No country Muslim or otherwise is immune from gambling. However, thanks to clear prohibition and condemnation of gambling in the Quran at least legalised gambling in Muslim countries is generally not allowed or if allowed is often restricted to targeting tourists. Casinos do exist in Egypt, Lebanon, Malaysia and even in Palestine (amidst all the trouble!) for a period before being closed down in 2000. Gambling in Israel is illegal, so they used to travel to a casino inJerichoinPalestine–Palestinianswerenotallowed to gamble, but they did comprise most of the workforce!

The growth in online gambling is another hugeproblem–itnowtakesgamblingintothehome making it easily accessible to anyone with internet access and money. According to a survey of the 5,000 secondary students conducted by the Gamblers Rehab Centre Malaysiaindicatedthat89%admittedtohavebeen exposed to gambling before they even hit the age of 12.

The ill effects of gambling on individuals, families and society are well documented. Gambling is all consuming, leading to great stress and anxiety. It takes man away from his prayers and remembrance of Allah leading to a descending spiral of moral decay

and corruption. It is often accompanied by other vices such as drinking and drugs and like a domino leads to many more vices. These include cheating, fraud, stealing and accumulation of gambling debts. The lure of easy money, the glitter and dazzle of casinos make gambling very addictive. Addiction leads tofinancialruinanddisasterforindividualsandbrings heartbreak and sorrow to their families. Mostprofitcomesfromproblemgamblers–howevertheypayaheavypricewiththeirjobs, their houses, their health and their families. It discourages hard and honest work andpromotesselfishness,hatredandgreed.Obsessive gamblers waste an extraordinary amount of their time neglecting family and work.

Unfortunately the common attitude that prevails especially where gambling is legalised is that people should have the freedom to decide what they want to do with their money and their time even if it leads to disgrace and tragedy. Unlike our governments, Allah’s law shows his love for his creation by protecting and keeping us safe from that which is not good for us.

Closely related to gambling is speculation. Speculation needs to be distinguished from investing. It is generally characterised by buying liquid assets for a very short period with the sole intention of betting on short term price movements. Speculation in its extreme form is the same or sometimes even worse than gambling itself i.e. it is possible for the speculator to lose all their capital and in the case of leveraged speculation the losses can easily exceed the initial capital placed.

Speculationisahugeelementofthefinancialmarkets today and earns huge commission and fees for intermediaries. The biggest and most liquid market in the world today is foreign exchange - $5.3tn changes hands every day (FT Nov 2013). According to the economist Bernard Lietaer, author of The Future of Money,backin1975about80%offoreignexchange transactions involved the real trading of a product or a service. However, by 1997 the percentage of foreign exchange which involved transactions in the real economy was only 2.5%! According to the Global Policy Forum, by 2011 only a tiny 0.6% of foreign exchange could be traced to genuine international trade in goods and services. Of the remainder, a minimumof80%wasdirectlyattributabletospeculation. This of course is just the tip of the speculationiceberg.Inallfinancialmarketssuch as the stock market, debts, oil, gold and other commodities speculation is pervasive. Speculation causes bubbles to blow up in asset prices. When the bubble inevitably bursts, it unleashesatsunamioffinancialhardshipandeconomic misery as individuals, companies and

even nations go bust. This is in addition to all the usual problems associated with gambling already mentioned. Huge corporations and governments have been brought to their knees as result of the reckless actions of speculators. Speculation is a huge waste of time and resource–nonewwealthiscreated,itissimplytransferred from one to other and constantly eroded by the fees of brokers and taxes of governments.

Another very important principle is the avoidance of Uncertainty or using the Arabic term ‘Gharar’. Gharar is a broad concept that encompasses deceit, fraud, uncertainty, danger, peril, delusion, or hazard that might lead to destruction or loss. This means that any trade or transaction should be free from contractual uncertainty. There should be no ambiguity in the key terms and subject matter of the underlying contract or deal. This principle has very important implications for howbusinessshouldbeconducted.Allfinancialand business transactions must be based on full transparency and disclosure, so that no one party has an unfair advantage over the other. The aim is to protect all parties from deceit, ignorance and uncertainty. This has been emphasised in the hadith of the prophet (PBUH); “Do not meet the merchant in the way and enter into business transaction with him, and whoever meets him and buys from him (and in case it is done, see) that when the owner of (merchandise) comes into the market (and finds that he has been paid less price) he has the option (to declare the transaction null and void)” (Muslim). Thus one is not allowed to take advantage of the seller’s ignorance of the market price. In a modern context, this closely aligns with insider tradinglaws.Thefinancialservicesindustryloves to innovate and speculate - contracts such as forwards, futures, options, and other derivatives are rendered invalid because of gharar.

Of course no matter how fair, balanced and justafinancialsystemis,therewillstillbethosewho are rich and those who are poor. Zakat which redistributes wealth from the rich to the poor is such an important element that it is obligatory and is one of the 5 pillars of Islam. It is mentioned many times in the Quran and is associated with prayers, doing good deeds, mercy and forgiveness.

The Believers men and women, are protectors one of another: they enjoin what is just, and forbid what is evil: they observe regular prayers, practice regular charity, and obey Allah and His Messenger. On them will Allah pour His

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mercy: for Allah is Exalted in power, Wise. (Surah 9 Al-Tawba)

It is a serious matter. The prophet (PBUH) said “I have been ordered to fight against the people until they testify that there is none worthy of worship except Allah and that Muhammad is the Messenger of Allah, and until they establish the Salah and pay the Zakat. And if they do so then they will have gained protection from me for their lives and property, unless (they commit acts that are punishable) in accordance to Islam, and their reckoning will be with Allah the Almighty.” (Al-Bukhari & Muslim)

In Arabic, the word Zakat means blessing, purity, growth and uprightness. In the Shari’a (Islamic Law) it denotes the obligatory 2.5% of net wealth Muslims have to pay on an annual basis (lunar year) to recipients as prescribed in the holy Quran. It applies to those Muslims whose wealth is over a certain minimum level called the nisab. The nisab is measured in referencetogold(85gramsofpuregold)andsilver (595 grams of pure solver). One should have absolute possession of the wealth on which Zakat is due. For example, Zakat is not obligatory on money which is out of the owners reach for years or on debts owed but the debtor is insolvent. Certain wealth and assets are excluded from Zakat. These are possessions of a personal nature e.g. one’s private residence, furniture, car, clothes, tools of trade.

ZakatisamercyandablessingfromAllah–itgives the poor a right over a portion of the wealth of the rich. This is turn promotes social harmonyandbrotherlylove.Itpurifiesthewealth of the rich and increases their wealth in blessings.

One of the beautiful aspects of Islam is that it sets basic minimum requirements that all Muslims should adhere to. But it also gives plenty of scope to do much more and achieve greater blessings. So it is with charity giving. This brings us to the concept of Sadaqa i.e. general charity, giving over and above than that required of Zakat. It is highly encouraged and Allah promises huge rewards for charity giving.

“The likeness of those who spend their wealth in Allah’s way is as the likeness of a grain which groweth seven ears, in every ear a hundred grains. Allah giveth increase manifold to whom He will. Allah is All-Embracing, All-Knowing”. (Surah 2 Al-Baqara)

Charityisnotjustconfinedtogivingofwealth

ormoney.Theprophethasdefinedcharityinbroad terms as:

“Every joint of a person must perform a charity each day that the sun rises: to judge justly between two people is a charity. To help a man with his mount, lifting him onto it or hoisting up his belongings onto it, is a charity. And the good word is a charity. And every step that you take towards the prayer is a charity, and removing a harmful object from the road is a charity.” (Bukhari & Muslim)

Another charitable concept in Islam is known as Qard Hasan which means “Benevolent Loan”. This is generally a loan to help those who are needy,torelievefinancialstress,foragoodcause. Hasan means kindness to others and no interestoranyfinancialgainisexpectedfromthe loan. Just the principal of the loan is to be returned. Again this act is highly rewarded and encouraged by Allah.

“Who is he that will loan to Allah a beautiful loan, which Allah will double unto his credit and multiply many times? It is Allah that giveth (you) want or plenty and to Him shall be your return”. (Surah 2Al-Baqara)

The whole religion of Islam is infused with the mercy of giving charity. In a saying of the Prophet (PBUH) “When a man dies, all his acts come to an end, but three; recurring charity (sadaqah jariya) or knowledge (by which people benefit), or a pious offspring, who prays for him” (Sahih Muslim)

This has led to another noble and long-standing Islamic tradition of establishing Awqaf. The singular of Awqaf is Waqf which is a charitable endowment/trust. Monzer Kahf an

IslamicEconomicExperthasdefinedWaqfas“holding a property and preserving it so that its fruits, revenues or usufruct is used exclusively for the benefit of an objective of righteousness while prohibiting any use or disposition of it outside its specific objective”

It is very similar to an English Trust except that its purpose is charitable. There is a long legacy of wealthy Muslims donating property, land, buildings and money to awqaf which have played a very important role in supporting the socio-economic needs of society. Awqaf have taken care of a myriad of needs:

• provision of mosques, schools, and supporting scholars

• building of roads, bridges, and hospitals

• helping the elderly, the traveller, the sick, the orphan, the poor and those in debt

• animal welfare

AnIslamicfinancialsystemcannotbeseparated from Islam. Every aspect of the financialsystemshouldbeinharmonywithachieving the maqasid al-Shari’a. There are 3 key aspects; Firstly the philosophical aspect or our beliefs which provide the foundations of anIslamicfinancialsystem.Allahistheownerof all wealth and we are the trustees of this wealth. Our wealth is a means to achieve the pleasure of Allah. The second key aspect, are the practical rules and principles that we should follow i.e. Staying away from Riba, Gambling andSpeculation.Designingafinancialandmonetary system, which is honest, fair and just for all of mankind. Not a system which is leveraged so wealth can unfairly accumulate in the hands of the few. The third key aspect is the huge focus and emphasis on charity. This helps to redistribute income and wealth from the rich to the poor and create social harmony. Money isthekeyingredientinafinancialsystem.Todaymoneyanddebtarealmostsynonymous–97%of our money is debt. Money should be used as a tool to serve mankind, not mankind enslaved to money.

In both parts, I have painted a very bleak pictureofourcurrentfinanciallandscapewhichcontinues on a downward trajectory towards its inevitable collapse. However, there are reasons we should be optimistic. Firstly, is the realisation that Allah (SWT) is the creator and owner of the Universe and nothing happens anywhere in his creation unless by his will. “With Him are the keys of the unseen, the treasures that none knows but He. He knows whatever there is on the earth and in the sea. Not a leaf falls but with His knowledge: there is not a grain in the darkness (or depths) of the earth, nor anything fresh or dry (green or withered), but is (inscribed) in a record clear (to those who can read).” (Surah 6 Al An‘am). Secondly, though vast amounts of wealth have unfairly accumulated inthehandsoftheglobalelite–thewealthhas not disappeared - it is still here on planet earth! It just needs to be redistributed. Lastly, Allah (SWT) says he will destroy Riba. Though theproblemsofourRibafinancialsystemseem huge and insurmountable, Allah (SWT) has provided us with the solutions. Finally, remember Allah (SWT) said “... How often a small group overcame a mighty host by Allah’s Leave?” And Allah is with As-Sabirun (the patient).” (Surah 2Al-Baqarah)

FearlessTakaful IKHLAS

for the New Generation

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GIFR2015_240x300mm.pdf 1 14/1/2015 10:22:58 AM

An Interview With

CEO Sedco CapitalHASAN SHAKIB AL-JABRI

INTERVIEW

Hasan Shakib Al Jabri is an established leader in the Islamic asset

management industry. Winner of the GIFA Islamic Finance Personality

Award for 2013, Al Jabri has numerous accolades to his name. He has

developed a state of the art Islamic asset management business that fulfils

both Shari’a and ESG requirements. It is owing to his leadership role that

SEDCO Capital has emerged as a leader player in Islamic asset manager. In the interview below, he shares with us his experiences, which also reflects on his

management style.

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INTERVIEW

Please tell us about Sedco Capital, what it is, what it aims for and what are the different segments within it.

SEDCO Capital is a leading Shari’a and Environmental, Social and Governance (ESG) asset manager in the world. Although we are headquartered in in the Kingdom of Saudi Arabia, we have a global offering covering equities, real estate and private equity. SEDCO Capital currently has the largest set of Shari’a funds registered in Luxembourg than any other asset manager in the World. Our range of investments spans the globe, from the US all the way to the Far East.

Carved out from a family office and formed an independent Capital Market Authority (CMA) licensed company with an initial capital of SAR 50 million in 2010, the journey of SEDCO Capital’s transformation from being afamilyofficeintoaninstitutionalisedassetmanagementfirmrequiredenormousanddedicated efforts.

Please tell us your ownership structure and who are your shareholders?

SEDCO Capital is a subsidiary of SEDCO Holding. The Saudi Economic and Development Company (SEDCO), is a leading conglomerate investing in a number of sectors regionally and internationally. It is considered a major player in real estate development and management, hospitality, wealth management, auto leasing, and healthcare, all conducted in accordance with Islamic guidelines widely known as Shari’a. Itmanagesawideanddiversifiedspectrumofreal estate investments, equities investment, and other businesses in Saudi Arabia and around the world.

Please share with us who are your clients? And how have you assisted them?

Our clients (international, regional and local), range from sovereign wealth funds, pension funds,financialinstitutions,institutionalinvestors,familyofficesandUHNWIs.Weprovide them a range of investment solutions that previously have not been available within a Shari’a investment context. Given our choice of 14 different global equity funds, coupled with our strong real estate and private equity offerings,we can provide a total asset-allocationinawell-diversifiedportfolio,uniquely for the Shari’a sensitive investor. We also provide white-labelled services to manage funds under third party names. SEDCO Capital also provides bespoke discretionary portfolio management services - in Saudi and GCC equities as well as Saudi real estate, we also offer our KSA clients and corporate-

financeadvisory.Amongourinvestmentsolutions, 10 solutions are also ESG compliant (environmentally friendly, socially responsible and follow corporate governance principles), which is a commitment we have bestowed upon ourselves moving forward.

How are you different to other asset management companies in investment advice and choices?

SEDCO Capital has a very strong and solid trackrecordthatspans28yearssinceit’sinceptionasafamilyofficein1976.Ourdiversificationinproductsofferingpairedwithour smart and innovative investment solutions and processes have promoted SEDCO Capital to be the leader in Shari’a compliant asset management. Our founders have played a vital role in the development of the Dow Jones Islamic index as well as recently becoming the first Islamic asset management company to sign the United Nations Principles of Responsible Investments (UNPRI). As a result of UNPRI, SEDCO Capital has opened up the market to conventional, responsible investors as well.

Socially Responsible Investing has lately become a buzz word for the Islamic banking and finance industry. Does that mean that Shari’a compliant investments are not socially responsible? What is the difference between the two and how does Socially Responsible Investments add value?

Following our leadership in Shari’a investing, we are very glad to be the pioneers in Socially Responsible Investing in the Shari’a world (asmentionedearlier,wearethefirstShari’acompliant asset manager to become UNPRI

signatory) and we have supported bridging the gap between the two industries when we announcedthelaunchofourfirst2ESGfundsin February 2013.

Shari’a finance is ethical by nature, this is an industry that has evolved for hundreds of year, and it has developed rapidly over the past 30 yearstoreachalmost1.831trilliondollars.Responsible investing has been evolving as well especially since the late 1996’s when Kofi Anan, UN Secretary General at the time, took a leading role in creating the UNPRI. Today it has become more than 10 trillion dollar industry. With our in-house research we recongnised the commonalities between both the Islamic and ESG industries, as far as the negative screening is concerned and without losing focus on creating sustainable economies. We added value to their existing practices with our prudence approach in investing through our leverage parameter that avoid excessive leverage in investing (which ESG investing doesn’t consider) and we learned more about active involvement which we started applying to our investment processes and our manager selection processes.

An important element in bridging this gap is to help explain to the world what Shari’a compliant investing is all about, and its resemblance to responsible investing.

Sedco Capital has recently launched funds platform in Luxembourg, can you please share more details on it.

SEDCO Capital Global Funds (SCGF) is a family of 14 liquid strategies and 3 illiquid strategies that total to about $1.6 bn of AUM. We saw that Luxembourg is well recognised regulated jurisdiction to ease the access for investors no matter their domicile.

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ISLAMIC FINANCE REVIEW | MARCH 2015

INTERVIEW

On the SCGF, we continue to conduct our thorough due diligence on the selection process of managers as well as have continuous monitoring and supervision. The platform also offers independent performance calculations, reporting, administration and custody; it is also pluggedintomorereputablefinancialsystemslike Bloomberg, Lipper, FundInfo and Morning Star. The platform has helped introduce strategies not only to Shari’a compliant, but ethical and responsible investors.

How challenging is it to explain benefits of Socially Responsible Investing to your shareholders and Shari’a sensitive investors? How much aware are the Shari’a sensitive investors of ESG issues?

It is a learning curve for us and for our clients; we explain what Shari’a is and what ESG is. We share our practices and inform them that it not only ensures the economic sustainably but also leads to good performance. By comparing the three main indices (Dow Jones Islamic Market

Index, MSCI Social and S&P 500) we realised that both the responsible and Islamic indices performed better than the conventional with a clear advantage for the Islamic (due to low leverage).

We feel responsible towards the industry and how important these investment methodologies are; this is what we communicate to our shareholders, every time we have an opportunity.

Please share with our readers the recent developments at Sedco Capital in terms of acquisition both in international and local markets.

In international real estate, SEDCO Capital has successfully executed transactions worth $1 billion over the past 3 years. We also successfully sold 21 investments in France, Malaysia, Singapore, UK, and Mexico while acquiring 19 investments in strategic markets such as USA, UK and KSA.

In liquid strategies, we have decided to launch a fund with the strategy that allows investors

to navigate the portfolio alongside different stages of the business cycle in terms of durable versus sustainable strategies (more cyclical). As there was an increase in the money market fund (sukuk murabaha), the main purpose of this extended offering is to allow the clients, which are Shari’a compliant, to protect their wealth during market down side.

As far as our offering is concerned, we have added to our portfolio a multi-asset class portfoliocalled“corediversifiedfund”whichasa strategy allows to enter into different terms of risk adjusted returns, using a cyclical asset allocation process, reviewed on quarterly basis.

In 2014, SEDCO Capital’s private equity programme continued its growth streak completing SAR1.4 billion worth of transactions. Exiting about SAR414 million and buying SAR321 million worth of equity deals, in addition to SAR665 million of new fund commitments. The new commitments came from9differentmanagers,diversifiedacross8regions globally. The private companies exited in 2014 were sold at a healthy multiple of 2.4 times (32% IRR).

Mr Al Jabri, you have been a CEO of Sedco Capital for quite some time now, tell us how different Sedco Capital is now from when you started?

It’ssimple.Wewereafamilyofficethattransformed into a well institutionalised, regulated, highly sophisticated and performance driven asset manager. To reach there, we had to beef up the team and build up operational, administrative as well as risk management capabilities to be able to provide good service to the clients. We also invested incompliance&audit,finance,treasuryandmarketing.

Today, we handle third party clients, and we have a good number of institutional investors as well as SWF and HNW investors. We also developed further our strengths in local equities (as an asset manager), real estate and agriculture. Also this required us to change the mindset to deal with all types of sophisticated clients.

What are the short, medium and long term plans of Sedco Capital?

Our aim is to beccome the leading Shari’a asset management company globally. While we have achieved this goal to a large extent, we realise that this is a dynamic goal and we will continue to exert utmost efforts to deliver to our clients the best opportunities and services. We must be well recognised in the Islamic world. Our goal in the medium and long run is to become


the asset manager of choice for Shari’a investors as well as ethical and responsible investors globally. Also we must be able to capture responsible clients who see us as a good investment company that has a superior track record, driven by a strong process and asset management team.

What challenges do you face in achieving your goals and working with investors from different backgrounds? And who are your competitors?

Market volatility is a constant element that we always have to manage, obviously the increasing regulatory requirements are becoming a major point of focus, as well as attracting and retaining the best talent.

Our investors are from different backgrounds, this is a positive challenge. As we have the most diversifiedgroupofinvestmentopportunitiesand fund strategies, we always have to listen to their needs and be able to advise them appropriately rather than be product pushers.

Our investments for the past 3 decades have always been global in nature, including developed as well as emerging markets, and through our Luxembourg platform we can deal with investors from all over the world.

Big private banks saw our products as being stronganddiversifiedintheShari’aworldand they started distributing them globally through fund platforms of some of the largest international and well regarded banks .In Saudi Arabia, we have a dedicated business development team.

We have different competitors for different asset classes and geographies, including GCC asset manager and global international banks.

Sedco Capital has been receiving a lot of industry awards, one of the recent one is the Global Islamic Finance Awards (GIFA) 2014 in Dubai, please share your thoughts on it and what it means to you.

GIFA has been doing a good job in identifying the market makers in the region and all over the world. We are very proud to receive recognition from GIFA as a socially responsible fund manager. All these great initiatives are in line with Shiekh Mohammad Bin Rashed Al Maktoum’s (Ruler of Dubai) vision to make Dubai the islamic economy capital of the world. We are very proud to have won many awards in the industry including the “Islamic Economy Award” for “Best Islamic Fund” presented to us by Sheikh Mohammad bin Rashed Al Maktoum in 2013 during the GIES.

INTERVIEW

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All that Sedco Capital has achieved would not have been possible without the hard work, commitment and support of your team, please share your views on the team and how do you motivate them as their leader.

We all work together, we always give positive feedback, we have a great working atmosphere and we base our culture on mutual respect; all these elements have made us an employer of choice in the industry where top talent is approaching us to join SEDCO Capital. All this is in line with our shareholders’ vision and the strong governance by the authority (and trust) given to management. Today SEDCO has been ranked as the 11th best working environment employer in Saudi Arabia.

Share with us your journey into Islamic banking and finance?

SEDCO Capital was born Shari’a compliant; we started all of our product offerings since inception to be in line with the principles and practices of Shari’a. As we developed over the years, we continuously innovated products and solutions in an industry that is based on interest and hedging; this proved to be very challenging. However our determination, experience of over 20 years and our well rounded team allowed us to develop products that not only lead in the Shari’a world, but also to be at par with conventional offerings from other banks.

Moreover, our scale has also contributed in providing very competitive TER’s in the market, which has put us at a clear advantage.

Share with the readers of ISFIRE a typical day of Hasan Al Jabri. How does it start and how it ends and what is on your must do list?

To have a clear schedule for the day, week, month, and even the year ahead of time is what you need to deliver and achieve. My work involves a lot of travel since a lot of our investments are international in nature. Our strong team manages their portfolio, yet I have to visit our clients and managers globally. Travel takes a lot of my time; nevertheless, we must schedule the time way ahead so you can useitefficiently.Idodelegatealotespeciallyto our strong team. I keep an open door policy to spend time in listening to senior and young staff.

I take lunch as an opportunity to have discussions with our colleagues; this helped to get to know them better and listen to them while keeping me in tune with the whole organisation on both a professional and

personal level.

What are some of the most exciting projects you have worked upon?

Over the past 2 year, our main focus has been on launching the Luxembourg platform as our work in bridging the gap between Shari’a and responsible investing. We are also working on a few projects to support SMEs that are vital for sustainable economic development.

The US real estate timing was spot-on so it was really quite an interesting opportunity to work on. Also developing our co-investment activities where we’re buying into very exciting businesses globally.

On the CSR front, the financial literacy programme developed by SEDCO holding in the name of “Riyali” has gained a lot of ground over the past two years included in the circle of beneficiaries’areyoungbusinessownersandstudent as at all levels. Another interesting CSR initiative that we are involved in is “Foras”, an angel investors programme that helps young Saudis develop their business.

You have contributed to the industry in different ways, through speaking engagements, article contributions etc. How do you balance these with the workload?

Thanks to the strong team that I have, they always help me with great ideas and with the day-to-day workload. This gives me the opportunity to spend more time on other engagements, which is also helpful in developing our knowledge and network.

One has to try and balance the requirements of the day-to-day business and our responsibility to share our knowledge with the industry. This gives us the chance to introduce what we are doing and share our view on the future, on the investment team and on the industry in general through our innovations and services we offer to our clients.


INTERVIEW

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A non-academic investigation into the networks that control Islamic

financial institutions

BANDBROTHERS

OF

Shari’a scholars are too damn powerful, “We must make Shari’a scholars more accountable,” “Islamic banking industry is hostage to a small group of Shari’a scholars” …

These are echoes of conversations many of those who are involved in Islamic banking andfinance(IBF)musthaveheardatvariousconferences, seminars and discussion groups. In fact, once there was a serious attempt (hopefully unintended!) By a small consultancy company to destroy credibility of Shari’a scholars. The so-called “social network” approach adopted therein certainly managed to dint the credibility of Shari’a scholars and in fact brought a lot of genuine issues to the forefront of the policy debate. But… the question remains. Who controls IBF? For disappointment of many (the likes of http://www.shari’ahfinancewatch.org), “Who Controls IBF” is not a who’s who of the people on the sanction lists drawn up by America and the EU. It is also not a guide to the so-called Islamic caliphate that seems to be emerging in parts of Iraq, Syria and the neighbourhood.

IBF has in fact emerged as an Islamic capitalistic movement,whichfitswellintheWesterncapitalism. This is one of the reasons that it failedtoearnpatronageofthelikesofHafizAlAsad (father of the current President Bashar

AlAsadofSyria),MuammarQaddafi,SaddamHussain and other leaders in the Muslim world, with inclination towards socialism. Interestingly enough, IBF initially failed to get traction from many other governments in the Muslim world. It was only after some heavyweight Western financialinstitutionsshowedtheirtrustinIBFthat some governments in the Muslim world started accommodating IBF in their regulatory regimes.

If it is not Al-Qaeda or its remnants who are controlling IBF, who is it that is behind the global movement of IBF? Is it Shari’a scholars who control IBF or the centre of power lies somewhere else? Is it actually a legitimate question to ask after all?

If ulama’, or Shari’a scholars, are not central to IBF, then who else? Is it the Saudi royal family? Are these the ruling families in UAE and other countries in the Gulf Cooperation Council (GCC) area, which are controlling Islamicfinancialinstitutions?Aretheresomeother invisible hands behind the growing globalIslamicfinancialservicesindustry?

Is there a dotted line between Islamic financialinstitutionsandtheglobalterroristnetworks? Where are most of the assets under managementofIslamicfinancialserviceslocated? To understand all these issues, it is important to look into a number of phenomena, mechanisms and processes:

A. Shareholding composition of some of the largest Islamic banks in the world;

B. RegulatorybodiesforIslamicfinancialinstitutions;

C. AffiliationsoftheShari’ascholarsinvolvedin IBF;

D. Attitudes of terrorist groups towards IBF; and

E. Involvement of non-Muslims in IBF.

WHO OWNS ISLAMIC BANKS?There are three categories of owners of Islamic banks:

A. Governments;

B. High Net Worth Individuals (HNWIs) and families; and

C. General public.

A. Governments

There have been a few governments in the Muslim world, which are friendly towards IBF.

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Malaysia is an exception where the government has taken an unambiguously strong and favourable approach towards the development of IBF. Almost all other governments in the Muslim world are at best indifferent to IBF and in some cases hostile towards its development. Admittedly, there are countries that have started showing interest in the development of IBF, and the newly elected government in Pakistan is one of them. It must, however, be emphasised that there is nothing sinister about this changing attitude of the governments in the Muslim world towards IBF. Similarly, it is only recent that the government in Turkey has started realising that IBF provides a great opportunity for it to attract Islamic capital from other parts of the Muslim world.

Arguably the strongest opponents of IBF in the Muslim world, the likes of the regimes of MuammarQaddafi,SaddamHussainandHosniMubarak, are no more relevant, but still there exists strong resistance to the introduction of IBF in most of the countries included in the Organisation of Islamic Cooperation (OIC). The opposition has largely come from the authoritarian regimes and, in case of democratic countries, from the bureaucracy.

Two notable countries where government-level support exists for IBF are Iran and Sudan. Both

countries are isolated from the global Islamic financialservicesindustryprimarilybecauseofthe on-going economic sanctions by USA and other allied countries.

Iranian banks account for about 40 per cent of total assets of the world’s top 100 Islamic banks. Bank Melli Iran, with assets of $45.5 billioncamefirst,followedbySaudiArabia’sAl Rajhi Bank, Bank Mellat with $39.7 billion and Bank Saderat Iran with $39.3 billion. Iran holds the world’s largest level of Islamic financeassetsvaluedatUS$489billion,whichis US$150 billion more than the next country in the list, i.e., Saudi Arabia. Six out of ten top Islamic banks in the world are Iranian.

It is also worth mentioning that Bangladesh is perhaps the most under-rated country in the world, although it has over 20% market share foritsIslamicbanks–doubleofthecomparablefigureforPakistan,whichhasbeenoneofthemost talked about and most frequently cited countryintheglobalIslamicfinancialservicesindustry. Although industry observers and analysts refer to Al Rajhi Bank as the largest Islamic bank in the world (excluding Iran), Islami Bank Bangladesh has escaped attention. With nearly 300 branches and about 12,000 strong staff, it has the largest Islamic banking network in Southeast Asia.

It is also worth mentioning that Bangladesh is perhaps the most under-rated country in the world, although it has over 20% market share for its Islamic banks – double of the comparable figure for Pakistan, which has been one of the most talked about and most frequently cited country in the global Islamic financial services industry. Although industry observers and analysts refer to Al Rajhi Bank as the largest Islamic bank in the world (excluding Iran), Islami Bank Bangladesh has escaped attention. With nearly 300 branches and about 12,000 strong staff, it has the largest Islamic banking network in Southeast Asia.

Why government support has not been forthcoming for IBF?

Although a number of factors may have contributed to the lack of support for IBF by Muslim governments in the past, it is however currently by and large a bureaucratic problem. It is no more seen as a political threat, which was erroneously the case in the past. Introduction of IBF requires substantial changes in legal frameworks, taxation laws, bankingandfinancialregulation,andpropertyrights. The bureaucracy in these countries findsitadauntingtask,andhenceisunwillingtochange the status quo.

If someone has to pick up five governments supporting IBF, weighted by their global significance,thefollowinglistwillemerge:

1. Malaysia

2. United Arab Emirates

3. Bahrain

4. Kuwait

5. Qatar

Interestingly,allthesefivecountriesareverysmallintermsofpopulation.TheirsignificanceandinfluenceinthepoliticsoftheMuslimworld is rather limited as well. None of the above countries has a population more than 30 million. While Malaysia has the highest population in the above group, it is notable that the Muslim population therein is only about 60% of the total population in the country. The governments of the countries with the largest Muslim populations are at best indifferent if not hostile to IBF. Indonesia, for example, is a secular country constitutionally; itsgovernmentfindsitdifficulttopatroniseIBFofficially.Intherecentpast,changesincertain laws have allowed Indonesia to use sukuk as a capital market instrument to raise funds for the public sector. Pakistan, which is constitutionally an Islamic republic, has for long resisted demands for transforming its economy

andfinancialsectorincommensuratewiththeIslamic economic doctrine. Similarly, despite having captured the market share of about 20%, Bangladeshi Islamic banks are growing through a market-based approach rather than an explicit government support. The politics of IBF in Turkey (with secular constitution) remains complex, despite recent sympathetic approach by the government. Egypt, despite being the birthplace of modern IBF, has also been careful in its treatment of IBF.

Malaysia

Malaysian government is by far the most committed advocate of IBF in the world. It is primarily due to the successive Malaysian governments and the role of a catalyst of Bank Negara Malaysia that Malaysia enjoys a vibrant Islamicfinancialsystem.Someoftheroyalfamilies in Malaysia have also been involved in IBF. The most obvious leadership role is being played by HRH Sultan Nazrin Shah of Perak (GIFA Laureate 2012) who serves as Financial Ambassador for Malaysia International Islamic Financial Centre (MIFC). The royal family of Negri Sembilan is also involved in IBF through its shareholding in the Bahrain-based Ithmaar Bank.

The government of Malaysia has direct and indirect shareholding in a number of Islamic financialinstitutions.Twonotablegovernmentinvestments are as follows:

Tabung Haji: Tabung Haji is the oldest example ofsuccessofanIslamicfinancialinstitution.Primarily a savings programme for those who intend to travel to Makkah for pilgrimage, TabungHajihasemergedasaninfluentialplayerintheIslamicfinancialservicesindustry,

TALKING POINTS

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withsignificantshareholdingsinBankIslamandanumberofotherIslamicfinancialinstitutions.

Khazanah: Malaysian sovereign fund, Khazanah, has been instrumental in promoting IBF in the country as well as outside Malaysia. It has been instrumental in developing an Islamic capital market through its various roles in the issuance of sukuk in the country. It also has significantshareholdinginFajrCapital,aDubai-basedIslamicprivateequityfirm,whichinturnhas 40% shareholding in Bank Islam Brunei Darussalam.

Furthermore, through MIFC Bank Negara Malaysia and Securities Commission Malaysia are pro-active in promoting and hence controllingtheIslamicfinancialservicesindustry.

Malaysia also hosts Islamic Financial Services Board–theglobalbodysetuptodevelopregulatory and prudential guidelines for the institutionsofferingIslamicfinancialservices.

United Arab Emirates

Although the UAE government has not beeninvolvedinofficialadvocacyofIBF,thegovernments and the ruling families in the country have invested heavily in Islamic banks andfinancialinstitutions.ItisonlyrecentthatthegovernmentofDubaihasofficiallyannounced to make Dubai as a centre of excellence for the global Islamic economy.

Dubai holds the distinction of hosting the oldest Islamic commercial bank in the world, namely Dubai Islamic Bank. Abu Dhabi, the more dominating emirate in the federation hasitsownflagshipIslamicbank,namelyAbuDhabi Islamic Bank (ADIB). In addition to these

two Islamic banks, a number of other Islamic banksandfinancialinstitutionsareoperatingin the UAE. Almost all these initiatives have royal patronage, although the Central Bank of the UAE does not seem to treat Islamic banks any different from their conventional counterparts. Hence, Islamic banks despite having shareholdings from the ruling families do not enjoy any preferential treatment. This is primarily due to the fact that most of the conventional banks are also either owned by the state governments or members of the ruling families.

ThroughtheseIslamicbanksandfinancialinstitutions, governments in the federation of UAEplayaninfluentialroleintheglobalIslamicfinancialservicesindustry.Forexample,DubaiIslamic Bank now operates as an international conglomerate with its investments in Pakistan (Dubai Islamic Bank Pakistan), Jordan and Sudan, etc.

Similarly, ADIB has in the recent years expanded into Egypt and UK. It has very aggressive plans to acquire assets around the world, especially in the MENA region. Al Hilal Bank, another bank owned by the government of Abu Dhabi, already has set up a bank in Kazakhstan and has potential to become a globalleaderintheIslamicfinancialservicesindustry.

Bahrain

Bahrain government has for long used itsfinancialsectorstrategytopromoteand develop IBF in the country to attract foreign capital. With the industry-building organisations like AAOIFI, IIFM, IICRA and LMC, Bahrain remains relevant to the global

Islamicfinancialservicesindustry,althoughsome other players like Malaysia, UAE and now Qatar are gradually claiming the leadership turf from it.

BahrainhasalsobeeninfluentialintermsofitsadvocacyroleintheglobalIslamicfinancialservices industry. Long before any other country, it patronised World Islamic Banking Conference (WIBC), arguably the largest annual gathering of practitioners of IBF in the world. Through such initiatives, the government of Bahrain succeeded in integrating the economy of Bahrain with the other economies in the GCC region.

Kuwait

Kuwait has played a globally visible role in the Islamicfinancialservicesindustry,spearheadedby Kuwait Finance House, which has direct presence in a number of countries, most notably in Bahrain (KFH-Bahrain), Turkey (Kuveyt Turk) and Malaysia (KFH-Malaysia). Apart from Kuwait’s role in setting up Islamic banks, it has been involved in setting up other firmsthatarenowofferingtheirservicestoIslamicbanksandfinancialinstitutions.Mostnotable of such an investment is in International Turnkey Systems (ITS), which is a global player intheIslamicfinancialtechnology.

The government of Kuwait has brought IBF into the mainstream by allowing non-ruling families to freely set up Islamic banks and financialinstitutionsandinsomecasesbydirectly investing in the industry. For example, the government of Kuwait holds almost half of sharesinKFH–oneoftheoldestIslamicbanksintheworld–throughKuwaitInvestmentAuthority(24.08%),PublicAuthorityforMinorAffairs(10.48%),AwqafPublicFoundation(8.29%)andPublicInstitutionforSocialSecurity (6.02%).

Through such institutions, the government of KuwaitattemptstoinfluencedevelopmentsinIBF in other major markets. A detailed analysis ofsuchaninfluenceandcontrolisincludedinthe forthcoming Global Islamic Finance Report 2015, to be released by Edbiz Consulting towardstheendofthefirstquarteroftheyear.

Qatar

The government of Qatar has in the recent years has aggressively acquired Islamic financialassetsaroundtheworld.ThroughIslamicfinancialinstitutions,ithasmademajorinvestments in a number of countries, including Pakistan (e.g., Pak-Qatar Takaful), UK (e.g., Al Rayan Bank, UK), and a number of countries in the MENA region. All Islamic banks in the state of Qatar have direct or indirect patronage of the royal family. Qatar Islamic Bank, Qatar International Islamic Bank and Al Rayan Bank have their presence in multiple jurisdictions

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and are deemed as global players in the Islamic financialservicesindustry.

B. HNWIs and Families

The following HNWIs and families are the movers and shakers of the global Islamic financialservicesindustry:

A. Prince Mohammed Al Faisal

B. Sheikh Saleh Kamil

C. Sheikh Sulaiman Bin Abdulaziz Al Rajhi

Looking at the above list, one is inclined to conclude that Saudi Arabia holds key to the globalIslamicfinancialservicesindustry,asall the three individuals are in fact Saudis. As mentioned earlier, however, IBF is much more than just being a Saudi phenomenon. A number of countries, and the HNW industrial families therein, own and control Islamic financialinstitutions.Forexample,Randereefamily, a UK-based South African family holds shareholdings(albeitsmall)inIslamicfinancialinstitutions in UK, Pakistan, South Africa and the South East Asia. There are numerous other suchfamiliesthatareinfluentialintheglobalIslamicfinancialservicesindustry.Inthisarticle,we shall restrict our focus to the above three HNWIs.

Prince Mohammed Al Faisal

If someone has to trace a royal connection in the globalIslamicfinancialservices industry, the buck goes back to no other than the late King Faisal Bin Abdul Aziz

Al Saud whose eldest son Prince Mohammed Bin Faisal Al Saud played a pioneering role in developing IBF as a pan-Islamic phenomenon.

Initsfirstphaseofdevelopment,IBFbenefitedfrom the support and patronage of the likes of Prince Mohamed Al Faisal, the founder of Dar Al Maal Al Islami (DMI) Trust - technically a trust but in effect a holding company. Founded in1981,ithasanextensivenetworkstretchingover four continents, with well-integrated regional subsidiaries enabling it to respond to local business needs and conditions. Based on this geographic structure, the DMI Group and associatesactasafinancialbridgebetweentheworld’sleadingfinancialcentresandIslamiccountries.

The Group comprises three main business sectors: Islamic banking, Islamic investment and Islamic insurance.

Islamic banking is exercised in different forms: commercial and retail banking in the Gulf region and other parts of the world; fund management andfinancialservicesinSwitzerlandandJersey.

Islamic investment companies are located in Bahrain, Egypt and Pakistan. There are also associated Islamic insurance companies based in Bahrain and Luxembourg, providing services to the Islamic communities in the Middle East and Europe.

The Board of Supervisors of DMI Trust directs and oversees the business of the Group. DMI Administrative Services S.A., located in Geneva, Switzerland, provides assistance to the Board of Supervisors, in particular in the areas oflegalandfinancialcontrol,auditandriskmanagement and information technology.

DMI Trust is an institution that creates, maintainsandpromotesIslamicfinancialinstitutions. Asset management is one of the Group’s core business activities. Primary success of the business lies in the strategy that it invests clients’ funds prudently along with the principal shareholders’ funds with the objective of earning secular returns, although the businesses and transactions are Shari’a compliant. Given the depth of its investors’ base, DMI has devised a comprehensive range ofIslamicfinancialinstrumentstochannelinvestors’ funds into viable Shari’a compatible operations and investments.

Through DMI Trust, Prince Mohammed developed a network of Faisal Banks in different parts of the Islamic world, notably in Pakistan, Egypt and Sudan. After a lot of restructuring of the group and a series of mergers and acquisitions, Faisal Bank brand haslostitssignificanceinthemainstreamIBF,although the founding shareholders in the DMI Trust continues to hold stake in a number of Islamic banks, most notably Ithmaar Bank of Bahrain.

Although Prince Mohammed Al Faisal’s visibility in IBF has decreased following the restructuring of the DMI Trust, there is no doubt that his vision and strategic thinking remain central to the development of institutions owned by the DMI Trust. He is most widely revered in the Muslim world, and is treated with due respect in the Western world. Although after 9/11, there were attempts to tarnish his image, people like Richard A. Debs, an advisory director at Morgan Stanley and vice chairman of the United States-Saudi Arabian Business Council, thinks, “Prince Mohammed has been unfairly persecuted and attacked. I just don’t see the connection between Islamic financeandIslamicextremism.”

The new face of DMI Trust is Prince Amr Mohammed Al Faisal, a son of Prince Mohammed Al Faisal. DMI Trust continues to holdinterestsin55Islamicbanksandfinancialinstitutions around the world, although Ithmaar Bank is now the new face of the businesses owned by it.

Based in Bahrain, Ithmaar Bank is now the flagshipinstitutionofDMITrust,whichholdsinterests in a number of banks and non-bank financialinstitutionsinanumberofcountries.In February 2013, Ithmaar Bank merged with one of its Bahrain-based associates, First LeasingBank,increasingitscapitaltoUS$758million.

Sheikh Saleh Kamil

Anotherinfluentialpersonality in IBF is Sheikh Saleh Kamil, founder and Chairman of Dallah Al Baraka Group that owns Al Baraka Banks in Bahrain, Pakistan, Bangladesh,

with strong presence in other OIC countries Jordan, Tunisia, Sudan, Turkey, Egypt, Algeria, South Africa, Lebanon, Syria, Iraq, Saudi Arabia, Indonesia and Libya.

Interestingly, like his other peer, Prince Mohammed Al Faisal, Sheikh Saleh Kamel chose to operate outside his native Saudi Arabia. This was supposedly a deliberate pan-Islamicstrategytobenefitfromthevastmarketof the OIC comprising 56 countries.

Sheikh Sulaiman Bin Abdul Aziz Al Rajhi

The largest Islamic banks by size are arguably the Iranian state-owned banks. Outside Iran, Al Rajhi Bank is the largest Islamic bank in terms of assets under

management and market capitalisation. The principal shareholders of the bank are Al Rajhi family,whichisaninfluentialindustrialistfamilyin the Kingdom of Saudi Arabia.

Although Sheikh Sulaiman Al Rajhi has now retired from all of his businesses after donating his personal wealth, Al Rajhi Holding continues to play a dominant role through several of his sons. Outside Saudi Arabia, the family owns Al Rajhi Bank in Malaysia, and a number of companies(industrialaswellasfinancial)throughout the world.

C. Regulatory Bodies

Although there are a number of regulatory bodies on a global level to bring discipline to IBF, but none can be considered as controlling theIslamicfinancialservicesindustry.MostofthefinancialregulatorstreatIslamicbanksandfinancialinstitutionsonaparwiththeconventionalbanksandfinancialinstitutions,with no separate regulatory framework for the former. Exceptions do exist, e.g., in Malaysia where separate laws and regulatory

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regimes exist for Islamic banks, takaful companies and Islamic capital market players. In other countries like Pakistan, Islamic banks, takafulcompaniesandotherIslamicfinancialinstitutions are regulated by State Bank of Pakistan (SBP) and Securities and Exchange Commission of Pakistan (SECP).

Nevertheless,therearefiveglobalbodiesthatattempttoinfluencepracticesofIBFintheworld:

A. Accounting & Auditing Organisation of Islamic Financial Institutions (AAOIFI)

B. Islamic Financial Services Board (IFSB)

C. International Islamic Financial Market (IIFM)

D. General Council for Islamic Financial Institutions (also known as CIBAFI)

E. Islamic Research and Training Institute (IRTI)

D. Shari’a Scholars

PerhapsthemostinfluentialShari’ascholarintheglobalIslamicfinancialservicesindustryisSheikh Muhammad Taqi Usmani, a Pakistani clericwhorepresentsthedominanthanfischool of Islamic jurisprudence. There is no denial of the fact that Shari’a compliancy remains central to IBF but it is important to underplay any sensationalisation of the power of fatwa. There is nothing sinister about the involvement of Shari’a scholars in IBF - they just happen to provide technical advice on Shari’a mattersrelatedwithbankingandfinance.In most of the countries where the role of Shari’a scholars is emphasised upon in IBF, it is restricted to the advisory services on Shari’a matters.

Perhaps Malaysia is the only country where the banking regulator, BNM, is pushing for a role of Shari’a scholars in the corporate governance ofIslamicfinancialinstitutions.Thereareafew Islamic banks in Malaysia, where Shari’a scholars sit on the boards of directors of the banks as well as being members of the Shari’a advisory committees. However, it is important to note that such scholars in Malaysia do not come from the pure madrasa backgrounds. For example, the recently restructured Shari’a advisory committee of CIMB Islamic comprises of the following members:

1. Dr Mohamed Azim Mohamed Adil (Chairman and also an independent director of CIMB Islamic Bank)

2. Dr Mohammad Hashim Kamali

3. Sheikh Nedham Yaqoobi

4. Sheikh Dr Haji Mohd Nai’m Haji Mokhtar

5. Dr Shafaai Bin Musa

6. Dr Yousef Abdullah Al Shubaily

7. Dr Noor Inayah Yaakub

8. SheikhMuhamadTaufikRidlo

9. Professor Dato’ Dr Sudin Haron (also an independent director of CIMB Islamic Bank)

Out of the nine members of Shari’a Advisory Committee of CIMB Islamic, two are also independent members of the Board of Directors of the bank. This is a clear indication of the growing importance of Shari’a compliance in the Malaysian IBF. CIMB Islamic Bank’s Shari’a Advisory Committee is perhaps the largest such committee of an Islamic bank anywhere in the world. It comprises traditionally trained Shari’a scholars as well as those who attended contemporary universities, possessing either formal education in or practical experience of IBF and Shari’a.

Other Malaysian Islamic banks with overlapping membership of Shari’a Advisory Committee and Board of Directors are given in Table 1. Not all Islamic banks in Malaysia have such

overlapping memberships but it is a trend being followed by an increasing number of institutions. It is interesting to note that full-fledgedstandaloneIslamicbankslikeBankIslam, Bank Muamalat and Bank Rakyat have so far not opted for overlapping memberships, perhaps because such institutions already have a strong commitment to Shari’a assurance and that the senior management are already deemed fully committed to Islamic banking. The Islamic banking subsidiaries of conventional banks use overlapping memberships to indicate to the market that there is strong and full commitment at the shareholders level to upholding Shari’a principles.

Another interesting feature of appointment of Shari’a Advisory Committees at the bank level is that such committees are restructured very frequently to ensure that no individual Shari’a scholarsaretoostrongandinfluentialatthebanklevel.TheinfluenceofindividualShari’a

NO. NAME OF BANK MEMBERS OF SHARI’AADVISORY COMMITTEE

ALSO MEMBERS OF BOARD OF DIRECTORS

1. Affin Islamic Bank 1. Dr Said Bouheraoua (Chairman)2. Dr Ahmad Azam Othman3. Dr Zulkifli Hasan4. Dr Yasmin Hanani Mohd Safian5. Mr Muhammad Mahbubi Ali

1. Dr Said Bouheraoua

2. CIMB Islamic Bank 1. Dr Mohamed Azim Mohamedd Adil (Chairman)

2. Dr Mohammad Hashim Kamali3. Sheikh Nedham Yaqoobi4. Sheikh Dr Haji Mohd Nai’m Haji

Mokhtar5. Dr Shafaai Bin Musa6. Dr Yousef Abdullah Al Shubaily7. Dr Noor Inayah Yaakub8. Sheikh Muhamad Taufik Ridlo9. Professor Dato’ Dr Sudin Haron

1. Dr Mohamed Azim Mohamedd Adil

2. Professor Dato’ Dr Sudin Haron

3. Alliance Islamic Bank

1. Dr Abdul Rahman Bin Awang (Chairman)

2. Tuan Haji Md Ali Bin Md Sarif3. Ustaz Zaharudin Bin

Muhammad4. Dr Badaruddin Bin Hj Ibrahim5. Dr Muhammad Amanullah

1. Dr Abdul Rahman Bin Awang

2. Tuan Haji Md Ali Bin Md Sarif

4. Public Islamic Bank

1. Dato’ Dr Mahmood Zuhdi Bin Hj Ab Majid

2. Mr Mohd Ridzuan Bin Awang3. Dr Mohd Afandi Bin Awang

Hamat4. Dr Rusnah Muhamad5. Dr Abdul Bari Awang

1. Dato’ Dr Mahmood Zuhdi Bin Hj Ab Majid

TABLE 1: OVERLAPPING MEMBERSHIP OF SHARI’A ADVISORY COMMITTEE AND BOARD OF DIRECTORS IN MALAYSIAN ISLAMIC BANKING (SELECTED

BANKS)

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scholars at the bank level is further diluted by the centralised Shari’a Advisory Council of Bank Negara Malaysia (BNM), which has thefinalwordinmattersrelatedwithIslamicbanking and takaful in the country.

Each country has its own approach to Shari’a advisory. For example, the Middle Eastern countries have right from the beginning opted for a market-based approach to Shari’a advisory, allowing individual Islamic banks andfinancialinstitutionstoappointtheirownShari’a Advisory Committees. It is perhaps because of this allowance that the individual Shari’ascholarsaredeemedmoreinfluentialin the Middle East than in other parts of the world.

In Indonesia, Majelis Ulama is a body recognised by the central bank, Bank Indonesia, as a competent authority to issue fatwasandShari’arulingsonIslamicfinancialmatters. However, Majelis Ulama retains its independence from the central bank or any other government departments to ensure Shari’a authenticity.

Table 2 lists top 10 Shari’a scholars who have greatinfluenceinShari’amattersrelatedwithbankingandfinance.

IBF AND TERRORISMAfterananalysisofinfluenceofmainstreaminstitutions, families and individuals in IBF, a brief note on its possible link with terrorism is essential to wrap up the discussion.

Following the terrorist attacks in the New York, there was an extensive scrutiny of the activities andoperationsofIslamicbanksandfinancialinstitutions by the US government as well as other agencies and authorities in Europe and the countries in the OIC block. Although a

few charities run by Muslims were put on the blacklists of the US and European authorities, no credible links were found suggesting any systematic associations of such charities withtheIslamicfinancialinstitutions.Infact,thescrutinyofIslamicfinancialinstitutionshelped in understanding the nature of the IBFbusiness,andmanyWesternfinancialinstitutionsstartedhavingmoreconfidenceindoingIslamicfinancialbusiness.

WhileanumberofWesternfinancialinstitutions decided to start their IBF activities following the 9/11 attacks, many extremist Islamic groups started distancing themselves from IBF. A major reason behind this growing distance between extremism and IBF is the view taken by extremist groups that IBF is not sufficientlyIslamic.

WHY NON-MUSLIMS ARE INVOLVED IN IBF?As IBF is purely a business phenomenon, it is not surprising to see many non-Muslims involvedinit.Conventionalfinancialinstitutionsare engaged in IBF purely for opportunistic reasons. IBF is a US$2 trillion industry with huge growth potential, and a number ofWesternfinancialinstitutionswanttostrategically position themselves in the industry for prospective business opportunities.

Amongst non-Muslim individuals who have assumed importance in IBF for their academic as well as industry involvement, the following persons deserve special mentioning:

1. Professor John Presley

2. Professor Rodney Wilson

3. Professor Simon Archer

4. Stella Cox

5. Neil Miller

Professor John Presley

Professor John Presley isthefirstnon-Muslimrecipient of the prestigious IDB Prize in Islamic Finance. As a professor of economics and head of economics

department at Loughborough University, he played an instrumental role in developing Islamiceconomics,bankingandfinanceasanacademic discipline in the Western hemisphere. He, along with his colleague Humayon Dar, co-foundedthefirst-evermasterprogrammeinIslamiceconomics,bankingandfinanceeveroffered by a university in the Western world.

Professor Rodney Wilson

In 2014, Professor Rodney Wilson became the second non-Muslim to receive an IDB Prize in Islamic Finance. He has the distinction of supervising the largest

number of PhD students in the areas of Islamic economics,bankingandfinance,andhashugefollowingandinfluenceintheMuslimworld,especially in the Middle East where his former students hold key positions in government departmentsandIslamicfinancialinstitutions.After retiring from Durham University, he is now serving as an Emeritus Professor in Islamic Finance at INCEIF.

Professor Simon Archer

Professor Simon Archer supervised Professor

NO. SCHOLAR COUNTRY OF DOMICILE

AREAS OF INFLUENCE GEOGRAPHICAL INFLUENCE

1. Sheikh Muhammad Taqi Usmani

Pakistan Regulatory bodies, banks, takaful companies, asset management

Global

2. Sheikh Nedham Yaqubi Bahrain Banks and asset management Global3. Dr Mohamed Elgari Saudi Arabia Banks and asset management Global4. Dr Abdul Sattar Abu

GhuddahSyria Banks, takaful companies and asset management Global

5. Dr Hussein Hamid Hassan Egypt Regulatory bodies, takaful, asset management Global, particularly GCC6. Dr Mohd Daud Bakar Malaysia Regulatory bodies, takaful, asset management Global, particularly

Malaysia7. Dr Ali Al-Quradaghi Qatar Banks GCC8. Sheikh Abdullah Al-Manee’ Saudi Arabia Banks Saudi Arabia9. Sheikh Siddiq Al Dareer Sudan Banks and regulatory bodies Sudan10. Dr Yousuf Al-Qardwai Sudan/Qatar Banks and government bodies Qatar and Sudan

TABLE 2: TOP 10 SHARI’A SCHOLARS INVOLVED IN IBF

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Rifaat Abdul Karim (the founding Secretary General of AAOIFI and IFSB) for his PhD research, and subsequently got involved in developing an accounting and auditing framework for Islamic financialinstitutions

through AAOIFI. He has also been involved in developing a regulatory framework for Islamic financialinstitutionsthroughhisinvolvementwith IFSB.

Stella Cox

Stella Cox is a senior financialexpertwho has helped the Islamicfinancialservices industry by operationalizing commodity murabaha. Her contribution in IBF is more than of a practitioner as she

continues to play her advocacy role through her speaking engagements at conferences, seminars, symposia and workshops on IBF in the West as well as in the Muslim world. She is

also engaged with different government bodies in the UK to advise them on matters related withIslamicfinance.

Neil Miller

Neil Miller is one of the most recognised and awarded legal professionals in the Islamicfinancialservicesindustry. He was a member of the UK Treasury Committee

ofIslamicfinanceexperts,amemberoftheFSAcommitteeonIslamicfinanceandworkedclosely with the Muslim Council of Britain and other bodies to promote and develop Islamic financeintheUK.InJanuary2005Neilwasnominated as one of the “Hot 100” by The Lawyer in recognition of his work in developing themarketleadingIslamicfinancepractice.

With an over two decades of involvement in IBF in different leadership roles, Neil Miller isoneoftheinfluentialopinion-makersintheIslamicfinancialservicesindustry.

CONCLUSIONSThe above discussion demonstrates that there is no systematic effort to control the Islamic

financialservicesindustryforthebenefitofanyparticular stakeholder group. The perception amongst some cynics that IBF is a religious phenomenon that aims at aiding the Islamist movement is not substantiated by facts. There are certainly a few shareholders groups who have control over the industry to maximise theirprofits.Thisis,however,alegitimatebusiness objective in pursuit of which IBF is not much different from other forms of business.

Started as a pan-Islamic phenomenon, IBF is now seeking business in the markets that have not been on the radar of Islamic banks and financialinstitutions.IntheUKalonetherearesix Islamic banks set up by shareholders groups originating from the Middle East. Similarly, there is an ever-increasing presence of Islamic financialinstitutionsinthefinancialcentresaround the world. This should clearly show that IBF does not have any hidden agenda that movers and shakers of the industry may otherwise be pursuing. Any institution that putsforthitselfforscrutinyofsecularfinancialregulators cannot simply do so.


24

Introduction:Islamic Bankers Association (IBA) is a new international industry representative body for practitioners of Islamic banking and finance. It is officially incorporated in United Kingdom, with its registered office in London. The IBA membership is open to individuals and corporates, and aims to become the largest industry representative body for Islamic banking and finance in the world.

Membership categories include:Corporate Membership: For all Islamic banks and the institutions offering Islamic financial services – IIFS (Annual Fee: £3,500)

Associate Corporate Membership: For all businesses that offer their services to Islamic banks and IIFS (Annual Fee: £5,000)

Individual Membership: For all the employees of Islamic banks and IIFS, with work experience of a period of five years or more (Annual Fee: £100)

Young Professional Membership: For all the employees of Islamic banks and IIFS, with work experience of a period of less than five years (Annual Fee: £50)

Associate Individual Membership: For any professional whose application is endorsed by at least one existing member of IBA (Annual Fee: £100)

If interested in becoming a member, please get in touch with Khuram Shehzad on:+44 (0) 20 3617 1089 or [email protected]

Islamic Bankers Association is a non-profit organisation, registered in England and Wales as a company limited by guarantee, and does not offer any financial products and as such is not regulated by Financial Conduct Authority.

26

Do Young Muslims

Subscribe to Islamic Financial

Products?Dr Sofiza Azmi, Director of Strategy, Policy Development & Research at Asian Institute of Finance

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For the past 30 years of its existence, the Islamic Financial Services Industry (IFSI) has been successful in providing an array offinancialproducts.Wehavealsoseenasteady double-digit growth. According to the forthcoming Global Islamic Finance Report 2015,Islamicbankingandfinance(IBF)assetsgrewatanannualrateofabout17.82%between2008and2014.Andifitcontinuestogrowlikethis,globalIslamicfinancialservicesindustry is expected to reach US$5.3 trillion by the end of 2020. While it is an impressive growth in its own right, it is however important to investigate what future holds for the industry vis-à-vis new generation of Muslims who are fast changing in terms of lifestyle and financialchoices.

With only about 12% of the world’s Muslims currently subscribing to IBF, the potential for furthergrowthissignificant,anexpectationthat is reinforced by the fact that Muslims makeupaboutafifthoftheworld’spopulation.According to Pew Research Center, Muslims are forecasted to comprise of nearly 25% of the world’s total projected population of 7.7 billion by 2020 (Figure 1).

The question that arises: how can Islamic banks tap into growing market, especially unbanked segment of Muslims? Understanding the financialbehaviourofthissegmentisimportantfor Islamic banks to formulate a more effective marketing strategy. Most importantly, it is imperative that Islamic banks understand the financialbehaviourofGenerationYorbetterknown as Gen Y (under 30s) as they are the next generation of customers.

It is estimated that about 30% of the world’s Muslim population consists of young people under the age of 30, which implies that the Muslim community is a relatively young group. As Figure 2 depicts, over 60% of the population is under 30 years of age in Muslim-majority countries. In Malaysia, the below 30% segment makes up nearly 40% the population.

IBF is considered by many to be driving a new Islamicfinanciallifestyle,anditisassumedthat the young Muslims will by default opt for Islamicfinancialservices.Despitethegrowingperceived importance of young Muslim consumers in fuelling the next stage of growth inIslamicfinance,financialbehaviourofGenYis not yet well established.

GEN Y – WHO ARE THEY? Generation Y (or Gen Y) for the purpose of this article are the segment of population which is below 30 years of age. Millennials (another name for Gen Y) are the demographic cohort following Gen X. There are no precise dates when the generation starts and ends. Researchers and commentators use birth

yearsrangingfromtheearly1980stotheearly2000s. Generation X, on the other hand, are thosewhowerebornbeforethe1980s.

PwC calls them powerhouse of the global economy. Some refer them as the “Futurist” or the “New Muslim Consumer” as this young Muslim population is seen as more individualistic, ambitious than the mainstream Muslim consumer. They also have tastes and preferences that are very much distinctive from their parents. Studies have shown that they are more tied to their Muslim identity than previous generations and want to associate with brands that can elaborate this identity.

The spectacular acceptance and demand for Islamicfinancemeansthatwithinthenextdecade, the industry is likely to capture half the savings of the 1.6 billion-strong Muslim world over. It is tempting to assume that the growth is being fuelled by the Gen X of Muslims keen to take advantage of an offering that complies with their traditional way of life. Not so: the vast majority of the uptake comes from the under-30 segment of the Islamic world, and it is this segment that holds the key to success formorethan250Islamicbanksandfinancialinstitutions that now operate in more than 75 countries worldwide. The popularity of

Figure 1: Muslims as a Share of World Population, 1990-2030

10 billion

0

2

4

6

8

Non Muslims

Muslims 19.9% 21.6% 23.4% 24.9%

26.4%of worldpopulation is muslim

Percentages are calculated from unrounded numbers. Cross hatching denotes prjected figures

1990 2000 2010 2020 2030

Pew Research Center’s Forum on Religion & Public Life - The Future of the Global Muslim Population, January 2011

1.1 B 1.3 B

4.2 B4.8 B

5.3 B

1.6 B1.9 B

2.2 B

6.1 B

5.8 B

Figure 2: Percentage of Population of Muslim-Majority Countries in Selected Age Groups, 1990-2030

40%

0%

10%

20%

30%

Ages 0-14 15-29 30-44 45-59 60+

1990 2010 2030

Source: Pew Forum analysis of U.N data, weighted by country populations so that more populous countries affect the average more than smaller countries. Percentages may not add to 100 due to rounding. Cross hatching denotes projected figures.

Pew Research Center’s Forum on Religion & Public Life - The Future of the Global Muslim Population, January 2011

40.9%

31.9%

26.0% 27.5%28.5%

24.4%

16.3%

20.2%21.4%

9.3%

12.1%

16.3%

6.0% 7.3%

11.9%

28


IslamicfinanceamongtheseyoungMuslimsresponds to a resurgence of interest in their cultural and religious identity. This ‘baby boom’ of customers makes up the backbone of the industry.

However, due caution must be exercised when interpreting such anecdotal evidence as conclusive. More often than not, demand for Islamic banking products and services is anchored on the size of the growing Muslim population, which may not be the best predictor of demand. The growth of the Islamic financeindustryhasbeenlargelyfuelledbythedemandforShari’a-compliantfinancialservicesfrom segments of the population that are consistent with their religious beliefs. Although it is tempting to assume that the industry’s growth will continue in tandem with growth of young Muslims, this may be a perilous

assumption to make. The lack of rigour in understanding market behaviour and customer psychology may be an impediment to growth in the long run.

In a recent survey conducted by the Asian InstituteofFinance(AIF)onfinancialbehaviourof Gen Y working professionals in Malaysia, it was found that only 34% of young Muslims subscribedtoIslamicfinancialproducts(seeFigure 3). And of those who did, majority hadonlybasicbankingproducts–46%ofrespondents had savings account and less than 20% had a current account with Islamic banks. Another22%ofyoungMuslimsfinancedtheirpropertypurchasewithIslamichomefinancingormortgage.Althoughthismayreflectthemarket share of Islamic banking in the country, it has long-term implication for further growth.

It happens to be the case that the largest portion of demand for Islamic financial services in Malaysia still comes from the old generation – Gen X, as 64% of those who are already patronising IBF come from the population segment of 30+ years.

To have a more effective marketing strategy to target Gen Y Muslim customers, Islamic financialinstitutionsmustunderstandtheirfinancialbehaviourandfinancialknowledge.For example, the respondents were asked, “Whatarethesourcesoffinancialinformationtheyusedtogetadviceonfinancialmatters?”Interestingly, 67% of respondents said that theyseekinformationonfinancialmattersfrom family, friends and co-workers. Hence, word of mouth plays an important role in reachingouttothisyoungsegment.Thisfindingalso validates other research on consumer behaviour of Muslims, which showed that Muslim communities tend to score highly on Hofstede’s collectivism score. This implies that Muslims value word-of-mouth and in-group recommendations. And for young connected Muslims today, this is done at the click of a mouse.

Naturally, as a tech savvy generation, Internet is the most used source of information. A total of 64% of Gen Y Muslims used this channel as their main source of information toobtainadviceonfinancialmatters.Herelies an opportunity for Islamic banks to ramp up their business to serve this untapped segment. Developing Apps that allow these young consumer segments easy access to informationonIslamicfinancialproductsandservices offered, may be the key to attract new consumers.

The third most popular source of information isthebankofficersthemselves.Nearly40%said they sought advice from their banks on financialproductsandservices.Islamicfinanceprofessionals can then be looked as brand ambassadorsforIslamicfinance.Butlessthanhalfofrespondentssaidbankofficerswereable to answer most of their inquiries about the product with proof. Furthermore, in a survey conducted by Edbiz Consulting and published in the November 2014 issue of ISFIRE, it was reported that Malaysian banks do not rank high when it comes to loyalty amongst their employees.

This raises another question: whether professionalsintheIslamicfinanceindustryhave the relevant skills and competencies needed to perform their job effectively. In another study conducted by AIF, skills gaps amongstIslamicfinanceprofessionalswereaprominent feature in the talent landscape in Islamic banking. Skills that had the widest gaps (between an organisation’s skill needs and the current capabilities of its workforce) are strategic thinking and problem solving. These are skills that are categorised as highly urgent and need immediate intervention. Product knowledge, on the other hand, had a gap score of22–whichfallsunderthecategoryof“veryimportant” gap to close.

64%

The working Gen Y patronising IBF

The percentage of those from Gen X

who are patronising IBF

34%

60%(1% millionin number)

The Percentage of the less than 30 years (Gen Y) in the

total population

The percentage of Gen X in total population

40%(12 millionin number)

Figure 3

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29

AIF’ssurveyofGenY’sfinancialbehaviouralsopointedtosomedisturbingfindings.OnlyhalfofGenYwhosubscribedtoIslamicfinancialproductssaidtheyunderstoodhowprofitratesare calculated and less than half (42%) said they havefullknowledgeofthefinancialproductsthey had purchased. When asked to assess theiroverallfinancialknowledge,61%saiditwas only average, i.e., having limited knowledge. ThesefindingsimplythatmajorityofGenYstillhavelowunderstandingsofIslamicfinancialproducts and services.

Thesurvey’sfindingsalsoshowthattheaverage number of Islamic banking products per Gen Y customers is just two, mainly depositsandhomefinancing.Whilefortheconventional banks, they normally have an average of 5 products per customer. Hence, Islamic banks would need to focus more efforts

onbuildingconsumerconfidencethroughservice excellence especially in cross selling. If Islamic banks can do this successfully, the market share of Islamic banks is estimated to increase by 40% from this segment of young consumers. On the other hand, if 20% of the Gen Y are disillusioned by IBF by the time they enter the relevant cohort of Gen X (in future), it is expected to pull down the market share of Islamic banking in the country by 1.32%, if all other things are kept constant (see Figure 4). This is what may be called retardation effect. This is an alarming situation requiringIslamicbanksandfinancialinstitutionsto devise individually as well as collectively to consistently increase their share in the market.

Thesurveyalsolookedatthefinancialbehaviour of Gen Y Muslims. They were asked how much did they allocate of their money

on a monthly basis on savings, investment, loan repayment, living expenses and lifestyle. Someinterestingfindingsemerged.About57% said they allocated between 10% and 20% of their income for savings purposes whilst 24% allocated more than 30%. Only 32% of Gen Y Muslims set aside money for investments. And of these young Muslims, 56% said they allocated between 10% and 20% for investment purposes while only 2% allocated more than 30%. Unsurprisingly, 66% of young Muslims allocated between 10% and 20% of their income for lifestyle purposes such as clothing, accessories and holidays.

The key to gaining greater market share lies in the ability of Islamic banks to attract the growing middle class of young Muslim consumers.Theabovefindingsprovidean understanding of young Muslims’ financialbehaviourinamorepredictiveandcomprehensive manner. While Islamic banks are reinventing their business models to provide differentiated customer service and scaling up to meet global competition, the banks that are catering to young Muslims are certainly poised for the next wave of growth.

More importantly, Islamic banks as individual players and as part of the Islamic financialservicesindustryhavetodeviseacomprehensive strategy for competition and growth. Assuming that the younger generation will follow the religious sentiments of their parents and hence will continue to patronise IBF may prove fatal. In the world of cut throat competition, complacency has no place.

Figure 4:

Gen Y patronsing IBFGen X patronsing IBF

340,000 660,000

Gen Y patronsing IBFGen X patronsing IBF

680,000 1,868,000

2015 2015

Out of 5 million, 1 million people (20%) patronise IBF:

Out of 5 million, 1.868 million people (18.68%) patronise IBF:

0.5% of the Gen X exit33% of the Gen Y enters

the Gen Xsegment33% new population

enters Gen Y segment

20% of the Gen Y Phase Out of IBF when

entering Gen X


30

Challenges & Opportunities in Islamic Finance Education

An ISFIRE Report to which Fouzia Hassan Abdullah contributed significantly, along with research team of Edbiz Consulting

ISFIRE REPORT

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ISLAMIC FINANCE REVIEW | WWW.ISFIRE.ORGISFIRE REPORT

An associate professor specialising in Islamic banking and finance (IBF) resigned from his current position at a university in Pakistan to join another to receive a salary almost double of what he was earning at that time. The university in question had to find a replacement on an emergency basis, as development of its IBF programmes was in jeopardy due to the movement of that particular staff. Similarly in the UK, a university hired two professors of Islamic finance, who left their jobs at two other universities that are now facing difficulties in finding their replacements. These are not isolated cases of shortage of human resources in IBF. In fact, in some cases the problems are even more acute. Another institution was in serious trouble a couple of years back when its sole professor of Islamic finance left to start a new job in Saudi Arabia. Facing the short notice, the institution had to arrange for temporary resources to supervise five PhD students the professor in question left behind unsupervised. It proved to be an extremely difficult and painful process for the management as well as the students.

Lured by the rhetoric of limited human resources in the global Islamic financial services industry, a British youth embarked upon his journey of education in IBF by leaving his country of birth – UK – and enrolling himself at an undergraduate course at International Islamic University Malaysia. The young man was intelligent, hardworking and on top of that possessed excellent English language skills. He finished his undergraduate studies with distinction and won a scholarship to study for a master degree in Islamic finance at INCEIF. He spent six months as an intern with London-based Edbiz Consulting (under HD Placements), as a partial requirement for his degree programme at INCEIF. He, however, had to spend more than one year at Edbiz before succeeding in procuring a full-time position with a Middle East based Islamic bank. This particular person was lucky to have exposure to the global Islamic financial services industry by working with a world leader in Islamic financial consultancy and intelligence. There are scores of other able graduates of IBF, who find it hard to procure a meaningful position with an Islamic financial institution in a reasonably short span of time.

HDPlacementsisanIslamicfinanceinternshipprogramme that was founded by Professor Humayon Dar when he was the CEO of Dar Al Istithamar, subsidiary of Deutsche Bank. Since then, it has helped numerous young graduates toenterglobalIslamicfinancialservicesindustry, many of whom are now serving at key positions. Two glaring examples are as follows:

Mehdi Popotte:AfterfinishinghisMScIslamicFinance at Durham University, Mehdi Popotte joined BMB Islamic as an intern for three months under HD Placements. He was keen to learn Shari’a structuring but the programme assessed him to be suitable for a sales and marketing role. He was exposed to various tasks in structuring, stock screening and marketing. Within three months, he found a job with Amiri Capital, a London-based Islamic financialfirmthatatthetimewasdevelopingan Islamic alternative investments platform. Within the next three months while he was with Amiri Capital, he was offered an even better opportunity with Abu Dhabi Islamic Bank where he is currently serving as a senior fixedincomeandequitytrader.

Wijdan Tariq: AfterfinishingMScAccountingand Financial Management at Lancaster

University, Wijdan Tariq joined BMB Islamic as an intern under HD Placements. He spent a lot of time on different research projects the team at BMB Islamic was involved in during his four months stay in London. Later, he decided to join an organisation involved in research & developmentinIslamicfinance.Heiscurrentlyserving as a Senior Researcher at Centre for Islamic Economics and Finance at Qatar Faculty of Islamic Studies.

These success stories must highlight the importance of mentoring in nurturing talent and development of human resources in the Islamicfinancialservicesindustry.Whilethereis huge interest in spending time, money and resources on education, very few people are willing to pay for mentoring. If proper awareness is created about this opportunity, this is a viable business in its own right.

INTRODUCTIONDemandforqualifiedandexperiencedhuman resources is set to rise with the ever-increasingnumberandsizeofIslamicfinancialinstitutions. This is having a positive effect on thedemandforIslamicfinancialeducationandqualifications.AUS$2trillionindustryasit

stands today; IBF is fast assuming mainstream relevance in a number of countries comprising the Organisation of Islamic Cooperation (OIC).Atthesametime,newIslamicfinancialmarkets are taking roots in the countries that have historically been unwelcoming to IBF. With this, a dire need is emerging for Islamic financeeducation,bothacademicallyandprofessionally.

This is in particular true in the countries with recent interest in IBF. Libya, Nigeria and Kenya areafewcountrieswherequalifiedpersonnelinIBFaredifficulttofind.Hence,anumberoftraining providers from other parts of the world are targeting these countries for providing trainings in IBF.

Even in countries like Pakistan where share of Islamic banking is merely 10 per cent of the total banking sector, there are huge growth prospects in terms of deposit growth and resource mobilisation through Islamic modes offinancing.Islamicbanksareexpandingratherquickly with new branches being opened very frequently. This is creating a resource gap in terms of demand and supply of bank staff who haverelevantqualificationsinIBF.

Impressed by this, State Bank of Pakistan (SBP) - the central bank - has launched a major initiative in offering financial support to universities and other institutions of higher learning in Pakistan in setting up specialised chairs in IBF. Although an Islamic seminary run by Mufti Rafi Usmani and Mufti Taqi Usmani – called Darul Uloom Karachi – has produced almost all the Shari’a advisors working in the IBF market in Pakistan, there has also been growing interest in other seminaries to expose their students to this field.

However, IBF education in the country is led by International Islamic University Islamabad (IIUI), which has fed human resources into Islamicfinancialservicesindustrylocallyas well as globally (please see Box 1 for a representative example of the kind of talent IIUI has produced for the global Islamic financialservicesindustry).Inaddition,anumber of universities and institutions of higher learning have in recent years embarked upon different projects related with teaching and research in IBF. The prestigious seats of learning like Lahore University of Management Sciences (LUMS) have also started showing interestinthisfield,primarilyduetogrowingvisibility of Islamic banking in the country and subsequentincreaseindemandforqualifiedpersonnel. Institute of Business Administration (IBA) - the oldest business school in Pakistan - has been offering modules in IBF for some

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ISFIRE REPORT


time. New entrants like COMSATS Institute of Information Technology Lahore, and PAF Karachi Institute of Economics and Technology (PAF-KEIT) have also recognised anopportunityinIslamicfinanceeducationand have embarked upon serious efforts to promote teaching and research & development (R&D) in this area. COMSATS has been organisinganannualconferenceinIBF–branded as Global Forum on Islamic Finance (GFIF)–inLahoresincetheyear2013,andthe2015 event is being organised on March 10th - 11th, 2015.

Most notable recent development in this respect is perhaps the setting up of International Institute of Islamic Bankers (IIIB) by Meezan Bank. With all these efforts, it is expected that Pakistan will emerge as a vital player in Islamic finance education.

Needless to say that Malaysia remains on the forefrontofIslamicfinanceeducation,withscores of universities and institutions of higher learningofferingdifferentcertificates,diplomasand degree programmes from bachelors to PhD levels. The most notable development in Malaysia in the last couple of years has been establishment of Finance Accreditation Agency (FAA), which has developed a comprehensive frameworkforaccreditationofIslamicfinancequalifications.FAAhasalreadyreceivedrecognition on a global level, and it is expected to play an important role in standardising Islamicfinanceeducationalandtrainingprogrammes.

The year 2015 will bring additional opportunitiesintheIslamicfinanceeducationmarket,astheglobalIslamicfinancialservicesindustry has already reached the mark of US$2 trillion. There is a need to explore cost effective ways of developing and delivering globallyrecognisedqualificationsinIBF.Thebest model for developing and delivering Islamicfinanceeducationisintheformof International Islamic Universities, e.g., International Islamic University Islamabad (IIIU) and International Islamic University Malaysia (IIUM) (Box 2 represents just one out of 100s of examples of success stories in IBF, which IIUM has contributed to). These universities offer courses in Islamic economics, banking andfinance,andShari’aandlawaspartofmainstream disciplines. While setting up of dedicatedIslamicfinancetrainingprovidersisunderstandable,havingafull-fledgeduniversityengaged in nothing but Islamic banking and financeisatbestpremature.Manyindustryanalysts believe that the initial idea of setting up International Centre for Education in Islamic Finance (INCEIF) was an excellent approach but its subsequent elevation to the status of a

university and degree awarding institution has yet to work.

There is a need to consolidate various efforts to develop a comprehensive model of Islamic financeeducation.Tostartwith,itisworthto consider merging IIUM Institute of Islamic Banking & Finance (IIiBF) and INCEIF (and its sister organisation International Shari’ah Research Academy (ISRA) for Islamic Finance) to form a bigger entity specialising in teaching and R&D in IBF. It may also be worth to consider bringing IBFIM under the same entity.

There is no denial of the fact that INCEIF has emerged as a global brand in IBF; whether on an operational level it is as successful as expected is a different question. Putting all the teaching and training resources under one strong brand - INCEIF - and attempting to create an Islamic INSEAD in Malaysia will be a huge achievement.

OthermarketsforIslamicfinanceeducationinclude Indonesia, UAE, Qatar, Bahrain, Saudi Arabia and the UK.

ISLAMIC FINANCE EDUCATION AND TRAININGSFor the purpose of this report, we differentiate betweenIslamicfinanceeducationandtrainings by referring the former as the academic courses offered by universities and institutions of higher learning and the latter as the courses offered by non-academic training institutions, leading to professional qualifications.

Islamic Finance Education Providers

In the Western world, Durham University has emerged as a premier institution of higher learning offering postgraduate courses (masters as well as doctorate) in IBF. Although a number of other universities are engaged in teaching and PhD supervision in IBF, Durham Universityleadsbyasignificantmargin.

Loughborough University in the UK, however, wasapioneeringinstitutionthatstartedfirstever MSc in Islamic Economics, Banking and Finance in the Western hemisphere. Professor John Presley and Dr Humayon Dar jointly startedthisMScprogramme–whichalthoughshort-lived–butproducedsomeofthemostcelebrated and able personnel in IBF. Whether it is Senator Dato’ Asyraf Wajdi Dusuki (from Malaysia) or Rashid Alkhan (from Bahrain), all the graduates of this programme went on to become established leaders in the global Islamicfinancialservicesindustry.Therearenumerous other distinguished graduates of the programme,notablyAzmatRafique(HeadofIslamic Banking at Oman Arab Bank), Madzlan Mohamed (Islamic Finance Partner at ZICO, Malaysia), and Akif Shaikh (Head of Retail Business and Innovation at Al Rajhi Bank Saudi Arabia).

Table 1 lists top 10 providers of Islamic finance education in the world. The table suggests, IBF has emerged as a globally recognised academic discipline in universities in the Muslim world as well as in the West. It is, however, fair to state that the discipline still lacks academic rigour and depth of analyses.

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A number of leading publishers are now regularly publishing textbooks in Islamic economics,bankingandfinance.ThemostactivepublishersinthisfieldincludeEdwardElgar, Wiley, McGraw-Hill and Edinburgh University Press.

Islamic Finance Training Providers

AmongsttheIslamicfinance-trainingproviders,IBFIM in Malaysia tops the list. Although Institute of Islamic Banking and Insurance (IIBI) in London has already seen past its glory days, it would be unfair not to mention its role inpioneeringroleinIslamicfinancetraining.The Diploma in Islamic Banking and Insurance offeredbyIIBIwasperhapsthefirstglobalqualificationofferedbyanynon-universityinstitution in the world. Another notable Islamic financequalificationproviderforaffiliatedtrainers around the world is Chartered Institute of Securities and Investment (CISI), which has developed arguably the most comprehensiveentry-levelqualificationinIslamicfinance,aptlynamedasIslamicFinanceQualification(IFQ).CharteredInstituteofManagement Accountants (CIMA) has also developed a comprehensive range of Islamic financequalifications.

Edbiz Consulting has also been involved in offering one/two day introductory workshops inIslamicbankingandfinanceunderitsflagshipIslamic Finance Access Programme (IFAP) in UK, Luxembourg, Switzerland, Pakistan and UAE.

All these initiatives and a long history of Islamic financeeducationandtrainingmakesUKasaglobalcentreofexcellenceforIslamicfinance

education.

Although IBFIM stands out in the Islamic financetrainings,Pakistanhasdevelopedsome of the most impressive training modules for Islamic bankers. In this respect, the role of National Institute of Banking and Finance (NIBAF) is noteworthy. Another new player in IslamicfinancetrainingsisMeezanBank’sIIIB,which is fast emerging as a premier centre of Islamicfinancetrainings.

Table 2 lists the top 10 providers of Islamic financetrainingintheworld.

CASE STUDIESBoxes 1-5 present five interesting cases of successful careers in IBF. Two examples are drawn from IIUI, one from IIUM and another two from Loughborough University.

There is one common denominator in all these cases, and that is of the role of Western universities in career development of the successful personnel in IBF. Global Islamic Finance Report 2014 reported top 10 CEOs of Islamic banks in Malaysia. Almost all the CEOs haveforeignqualificationsobtainedfromtheWesternuniversities.Thisshouldsufficientlyindicate that studying at an institution of higher learning outside the home countries contributes to accomplishment in an IBF related career.

Therefore, while a solid foundation in IBF is a pre-requisite for a successful career in IBF, it is absolutelyimportantthataformalqualificationfrom a top Western university is sought to have access to a job in an institution of national significanceorofinternationalrepute.

Onebenefitofattendinganinstitutionofhigher learning for a successful career in any field,includingIBF,isthehigherlevelofEnglishlanguageproficiencythatstudyingataWesternuniversity brings. While the likes of Sheikh Saleh Kamil, founder of Dalla Albaraka Group, put a heavy emphasis on Arabic language in

COUNTRY INSTITUTION FOCUS / SIZEPakistan International Islamic University

IslamabadGlobal / Medium

Malaysia International Islamic University Malaysia Global / MediumUnited Kingdom Durham University Global / SmallUnited Arab Emirates / United Kingdom

Cass Business School (DIFC Executive MBA)

Global / Small

Malaysia International Centre for Education in Islamic Finance (INCEIF)

Global /Medium

Qatar Qatar Faculty of Islamic Studies, Qatar Foundation

Global / Small

Bahrain Bahrain Institute of Banking and Finance National / MediumUnited Arab Emirates

Hamdan Bin Mohamed Smart University National / Small

Saudi Arabia King Fahad University of Petroleum and Minerals

National / Small

Malaysia Universiti Teknologi MARA National / LargeMalaysia Universiti Utara Malaysia National / Medium

TABLE 1: TOP 10 ISLAMIC FINANCE EDUCATION PROVIDERS

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ISFIRE REPORT


developing IBF as a phenomenon for promotion of an Islamic culture and identity, there is no denial of the fact that English language has emerged as the de facto language of legal documentation, especially if the transaction happens to be a cross-border one.

Because of that national talent development programmes (i.e., Emiratisation and Saudisation etc.) adopted by the countries in GCC and increasing preference for the local leadership in othercountries,itisalsovitalthatproficiencyin local language is also sought. Gone are the days when foreign personnel used to lead as CEOs of Islamic banks in the GCC countries and in Malaysia. While still there are some Islamic banks in the GCC, which have non-Arab CEOs, the local leadership has gradually taken over these roles. In Malaysia, one out of every fourth CEO of an Islamic bank was a foreign national, but now all the CEOs are Malaysian national. When Islamic banks were set up in the UK, all the CEOs were from the mainstream, nowthesepositionsarebeingfilledwiththeMuslims–thelocalaswellastheArab.

It is interesting to note that a strong foundation in Shari’a and law is a pre-requisite for serving asaShari’aadvisorinIBF.ZulkifliHasanandMian Muhammad Nazir are the two scholars who had solid academic backgrounds in Shari’a and law. In the case of the former, attendance ofatraditionalIslamicseminary–MadrasahIdrisiah–providedtherequiredfoundationonwhichZulkifliHasanbuiltfurtherbystudyingShari’a and law at IIUM. This, along with mentoring from the likes of Dato’ Asyraf Wajdi Dusuki, allowed him to serve as a member of

Shari’aAdvisoryCommitteeofAffinIslamicBank, and consequently be recognised as a Shari’a advisor. In the case of the latter,

working with one of the prominent Shari’a scholars of the present times, Sheikh Hussein Hamid Hassan, paved Mian Nazir’s entry into the Shari’a advisory. At present Mian Nazir is a member of the Shari’a Advisory Boards of anumberofIslamicfinancialinstitutions,inaddition to playing a senior level role in Dar Al Shari’a–aleadingShari’aadvisoryfirmbasedin Dubai.

Mansoor Shakil has a similar background to Mian Muhammad Nazir but the former chose to pursue a career in hard-core banking, and is now an experienced Islamic banker specialising in private equity.

In Rashid Alkhan’s academic progression Loughborough University featured prominent, as his MSc in Islamic Economics, Banking and FinancethereinistheonlyformalqualificationinIBF.Afterfinishinghispostgraduatestudiesat Loughborough University Rashid Alkhan joined KFH-Bahrain and has remained there since then. He took examinations of Chartered Alternative Investment Analyst Association (CAIA)andbecameCAIAin2008.Rashidwasa member of the transaction advisory team whichledthefirstthreewaymergerbetween3Islamicfinancialinstitutions.Rashidcurrentlyserves on the board and audit committee of a number of the bank’s investments. Rashid is the

COUNTRY INSTITUTION FOCUS / SIZEMalaysia IBFIM Regional / SmallPakistan National Institute of Banking and Finance National / SmallUnited Kingdom Chartered Institute of Securities and

Investment Global / Small

United Kingdom Chartered Institute of Management Accountants

Global / Small

Malaysia International Centre for Education in Islamic Finance (INCEIF)

Global / Small


Dar Al Shari’a Global / Small

Bahrain Accounting and Auditing Organisation for Islamic Financial Institutions

Global / Small

United Kingdom Institute of Islamic Banking and Insurance Global / SmallPakistan Alhuda Centre of Islamic Banking and

EconomicsGlobal / Small


Alhuda Centre of Islamic Banking and Economics

Global / Small

Pakistan International Institute of Islamic Bankers National / Small

TABLE 2: TOP 10 ISLAMIC FINANCE EDUCATION PROVIDERS

LLB (Hons) in Shari’a and Law from International Islamic University Islamabad (1996 - 2000)

Mansoor Shakil is an accomplished young Islamic investment banker. As an Islamic banker with now special interest and expertise in private equity, and extensive experience of working with international banks and financial institutions like HSBC and Fajr Capital, he provides an excellent example of success in IBF. Looking into his academic records, it is clear that his undergraduate studies at International Islamic University Islamabad provided him a solid foundation to build his success later at Cambridge and Harvard.

Box 1: Value Addition Chain for Mansoor Shakil

30%

35%

35%

LLM in International Financial System from harvard University (2003-04)

LLM in Commercial law from Cambridge University (2000-01)

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ISFIRE REPORT


author of the book “Islamic Securitization: A Revolution in the Banking Industry”, published in 2006.

Like Rashid Alkhan, Mufti Talha Ahmed Azami attended Loughborough University but after having been to a completely different set of institutions. His religious background, although impressive in its own right, was not helpful in entering an otherwise very competitive UK Islamicfinancialmarket.HisMAinIslamicBanking Finance and Management provided him the modern education that is deemed as an absolute requirement for a successful career in IBF.

Thesefiveareinterestingcasesofsuccessfulcareers in IBF and those who are considering acareerinthisfieldmuststudysuchcareerprogressions to decide for themselves what qualificationstheymustseektobesuccessfulin IBF.

CHALLENGES IN ISLAMIC FINANCE EDUCATION AND TRAINING MARKET Challenges

1. Lack of Human Resources

Availability of high quality educationalists and trainers is perhaps the biggest challenge facing theIslamicfinanceeducationandtrainingmarket. While the Western institutions (both universities and other training providers) are excellent managers of general quality controls and mechanisms, they are light in terms of human resources to offer in-depth education and training in IBF. There are simply notenoughhighlyqualifiedacademiciansatthe Western universities, who have strong interest in IBF. This is primarily the case, as the Western universities have so far not been entirely convinced that there is large enough marketforIslamicfinanceeducation.Eventhe universities like Harvard and Cambridge where IBF has shown some kind of visibility, the academic communities do not give it the kind of respect they have given to other disciplines like microfinanceanddevelopmentstudies.

In the whole Western world, there are no more than 10 committed senior academicians involved in teaching and research in Islamic economics,bankingandfinance.Theveteranslike Simon Archer, Rodney Wilson and John Presley have retired and some others (like Volker Nienhaus) are although active in research and training but are approaching the age of full retirement.

2. Too Many Too SmallThere are a number of IBF training providers with small operations. During and after therecentfinancialcrisis,anumberofIBFprofessionals lost their jobs and many of

Religious Education Madrasa Idrisiah (1994)

LLB from International Islamic University Malaysia (1997-2001)

Bachelor of Shari’a from international Islamic University Malaysia (2001-02)

Master of Comparative Laws: Shari’a and Law from International Islamic University Malaysia (2003-04)

PhD in Islamic Finance from Durham University (2008-11)

Zulkifli Hasan is an emerging Shari’a scholar in Malaysia. As an upcoming personality in IBF and a potential leader of future, it is interesting to look at the academic and professional institutions that have contributed to his success. He received sound academic training at International Islamic University Malaysia, which provided a strong foundation on which he built his analytical skills that he acquired during his PhD at Durham University. His religious education at Madrasah Idrisiah played a vital role in his academic development and later his recognition as a Shari’a advisor.

Box 2: Value Addition Chain for Zulkifli Hasan

20%

20%

10%

20%

30%

B.Com with specialism in Finance from Concordia University, Canada (1998-2002)

MSc in Islamic Economics, Banking and Finance from Loughborough Unversity (2002-03)

Chartered Alternative Investment Analyst from Chartered Alternative Investment Analyst Association (2007-08)

Executive Education from INSEAD, attending Corporate Financial Strategy in Global Markets (CFSGM) in 2008 and Management Acceleration Programme (MAP) in 2009

Rashid Alkhan is an Islamic banker of huge potential. He joined KFH-Bahrain after finishing an MSc in Islamic Economics, Banking and Finance at Loughborough University. Looking at his academic background, it is clear that his postgraduate studies at Loughborough University were a turning point in his career in IBF. Although a Bahraini national, all his studies have been in Europe and Canada.

Box 3: Value Addition Chain for Rashid Alkhan

15%

35%

35%

15%

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ISFIRE REPORT


them opted to start offering trainings in IBF. Ironically, this was not only wrong timing for these individuals, it also had an adverse effect on the incumbent training providers who started to struggle in maintaining their numbers.

Given the limited absorptive capacity of the Islamicfinancialservicesindustry,thereisnoscope for more than one training provider throughout the world. Too many small players (with “technically” unemployed part time so-calledtrainers)areinflictingmoreharmthanactually developing human resources for the industry.

3. Lack of Public Sector Funding and SupportInmostcountrieswhereIBFissignificantgovernment support for developing Islamic financeeducationandtrainingprogrammeshaseither been completely missing or inadequate. As mentioned earlier, Malaysian government has supported development of education and training in IBF. Similarly, the government of Dubai has formulated a policy to develop Dubai as a global hub for Islamic economy, and Islamic bankingandfinancefeaturessignificantlyinthis vision. The establishment of Dubai Centre of Islamic Banking and Finance (DCIBF) at Hamdan Bin Mohamed Smart University (HBMSU) is a step in that direction. In other countries, an explicit public sector policy in this respect has yet to emerge.

4. Language BarriersThere are some excellent academic and professional programmes available in a few Arabic-speaking countries (e.g., Saudi Arabia, Bahrain and Jordon) but they are taught only in Arabic, which creates a barrier to entry for non-Arabic speaking students and professionals. For example, General Council for Islamic Banks and Financial Institutions (commonly known asCIBAFI)hasbeenofferingcertificatesandother bespoke trainings in Islamic banking and financeintheArabicspeakingcountriesforanumber of years. Their language of instruction has mainly been in Arabic, although in some cases it has arranged for delivery of such courses in English as well. However, developing such programmes as English language offerings remains a challenge.

5. Absence of Regulatory Requirements for Recruitment of Staff by Islamic Financial InstitutionsApart from Malaysia, the regulators do not requireIslamicbanksandfinancialinstitutionstorecruitstaffwithspecificprofessionalqualificationsandskills.EveninMalaysiawherethe central bank requires Islamic banks and takaful companies to employ Shari’a personnel withspecificqualificationsandskills,there

are no such requirements for other staff. Consequently,Islamicbanksandfinancialinstitutions are not obliged to seek new staff withspecificIslamicfinancequalifications.Thisposes a serious threat to the sustainability of anumberofIslamicfinanceeducationsandtraining providers who face serious challenges in recruiting students.

Opportunities

1. Developing London as a Centre of Excellence for Islamic Finance EducationThere are about 16 universities and scores of colleges and other institutions of higher learning in London. These institutions have for long shown interest and engagement in IBF. However, none of them has been able to develop a centre of excellence in Islamic finance.Therehavebeensomehalf-heartedattempts by a few universities in London to develop relevant resources but they have not been meaningfully successful. For example, University of East London established a Centre of Islamic Banking & Finance in 2011 to offer education, training and consultancy services related with IBF. Nearly four years on and the centre has failed to make a mark on the industry. In fact, the founding management of the centre came from nowhere in the Islamic financialservicesindustryandwentbackto

where it came from. The people who were brought in as advisors possessed very shallow background in IBF, and hence were not able toplayasignificantroleinthedevelopmentof the centre. The University of East London continues to offer MSc in Islamic Banking and Finance, a course that has attracted only a limited number of students, consistent with the general trend at the British universities.

London School of Business and Finance (LSBF) has been offering a master programme in Islamicbankingandfinanceforquiteafewyears now. However, the number of students enrolled on this programme over the years has been limited and in fact diminishing every year.

Some other universities in London like Kingston University, School of Oriental & African Studies at the University of London, Queen Mary University of London, and University of Westminster offer single modules in IBF as options for their postgraduate degree courses. The registrations at these modules range from 10 to 25 students.

Given the relative limited success of the IBF degree programmes and the individual modules, it makes sense to develop a portable modular programme in IBF to be offered through participating (possibly all) universities and colleges in London. For example, a single module in IBF can be offered as an optional

Traditional schooling and informal religious studies at home with grandfather (a local ‘aalim)

BA, LLB with specialism in Shari’a and Law from International Islamic University Islamabad (1993-97)

LLM Commercial Law from Cambridge University (1997-98)

On-job training with Sheikh Hussein Hamid Hassan at Dubai Islamic Bank and Dar Al Shari’a (2005)

Mian Muhammad Nazir is one of the ablest Shari’a scholars of the new breed graduated from faculties of Shari’a and law at modern universities rather than old Islamic seminaries or madrasas. Since he joined Dubai Islamic Bank about 10 years back, he has worked closely with Sheikh Hussein Hamid Hassan, one of the most influential Shari’a scholars of present times. From the above Value Addition Chain, it is clear that the turning point in his academic career was attendance at International Islamic University Islamabad.

Box 4: Value Addition Chain for Mian Muhammad Nazir

15%

35%

35%

15%

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ISFIRE REPORT


module to the postgraduate students registeredinbankingandfinancerelateddegree programmes at the participating universities. The participating universities shouldpayafixedamountperstudent(e.g.,£400) to the developer-organiser company/institution. The participating universities will havethebenefitofofferinganadditionalmodule in a cost effective way, without having to hire full-time or part-time faculty and committing other resources. The developer-organiserinstitutionwillbenefitfromtheaccumulated number of students. For example, 10 students from each of say 10 participating universities will fetch enrolment of 100 students to the module. This will ensure the offering of the module on a sustainable basis. Increasing the number of modules thus offered may also allow the developer-organiser institution to offer its own degree programme (e.g., an MBA programme in IBF) in due course.

2. Need for a Global Islamic Finance Accreditation BodyBefore the setting up of Finance Accreditation

Agency(FAA)bybankingandfinancialregulators in Malaysia, there was a huge gapintheaccreditationofIslamicfinancequalifications.FAA,however,hassuccessfullyimplementedfirstphaseofitsplantodevelopa comprehensive quality and learning regimeforaccreditationofIslamicfinancequalifications.Nevertheless,thisareabyandlarge remains untapped and there is a need to develop a globally accepted specialized bodyforaccreditationofIslamicfinancequalifications.Thisisexpectedtobringtherequired standardization of curricula of the Islamicfinanceacademicandprofessionalqualifications.

Opportunity for Law Schools

IBF has emerged as a legalistic phenomenon, necessitating strong legal skills for the personnel involved in product development and structuring. However, law schools and departments around the world have so far failed to recognise this opportunity, although there is clear evidence that Shari’a and law

departments at IIUI and IIUM have in fact been the most successful academic departments that have supplied the most distinguished personnel totheglobalIslamicfinancialservicesindustry.It has been attempted to engage some top law schools in the world (e.g., Harvard Law School) withtheIslamicfinancialservicesindustrybutthis has either failed or has yet to bring real benefitstotheindustry.

3. Developing IBF Curricula to Achieve Socio-economic and Political ObjectivesIn the politically troubled countries facing real or potential security threats (e.g., Iraq, Afghanistan, Pakistan, Libya, Egypt and even Saudi Arabia etc.), it is important to bring curriculum reforms to feature IBF education as a tool for modernisation of juristic thoughts. The governments may consider investinginbusinessandfinanceeducation,with an emphasis on the relevance of Islamic commercial law. In this respect, emulating the International Islamic University models developed in Pakistan and Malaysia.

SUMMARY & CONCLUSIONSIslamicfinanceeducationandtrainingisanareafast developing, with a number of academic and professional institutions now offering a rangeofqualifications.Themarketisinundatedwith a number of small training providers and the quality and standardisation remain among the challenges the industry is facing. There is a need to develop a large institution of higher learningforIslamicfinanceeducation.Thiscanbe created through investing more resources into the likes of IIUI and IIUM. Alternatively, there are some institutions in Malaysia (notably INCEIF), which can be developed into a large globalcentreofIslamicfinanceeducation,ifproper consolidation of resources and mergers with other institutions is achieved as part of a strategic plan.

For those who are looking for a career in IBF must consider studying at a high-ranked university in the Western hemisphere. The Western universities, however, are not sufficientlyincentivisedtocommitresourcesto the IBF education, which despite being a growth area remains a marginal area of interest in Europe and USA. Professional bodies like CIMA and CISI have already developed qualificationsinIBF,whichareexpectedtoreceive global recognition if they apply for accreditation from the likes of FAA. IBFIM is another institution that has potential to become aglobalcentreofexcellenceforIslamicfinancetrainings. It will, however, have to continuously innovate to maintain its leadership role, given the new competition from the institutions in the GCC region.

Religious education at home with his father who is a great scholar of present times

BA in Arabic and Islamic Studies from Nadwa Islamic University India (1998-2002)

MA in Islamic Law from Nadwa Islamic University India (2002-04)

MA in Hadith Studies from Deoband Islamic University India (2004-05)

MA in Islamic Banking Finance and Management from Loughborough University (2006-07)

Mufti Talha Azami is an emerging Shari’a scholar in the UK and GCC. Given the huge potential and impeccable academic career (including studies at some of the top Islamic seminaries in the Indian sub-continent) he was presented with the Upcoming Shari’a Scholar of the Year Award at the inaugural Global Islamic Finance Awards at Muscat in 2011. Mufti Azami combines the finest of traditional Islamic education with the modern university education, and brings a value addition that very few other young scholars may otherwise be able to do so. The traditional scholars from an Indian background have faced difficulties in recognition in IBF outside India, but Mufti Azami is one shining example of success, as he currently heads Shari’a Compliance & Audit Department at Bank Sohar, Oman. He is also a member of Shari’a Advisory Board of European Islamic Investment Bank in London. In his success, a master degree from Loughborough University (which he received by studying at Markfield Institute of Higher Education in UK) played a vital role.

Box 5: Value Addition Chain for Mufti Talha Ahmed Azami

10%

20%

20%

20%

30%

38

INTERVIEW

Malaysian Rating Corporation Berhad (MARC) is a pioneering Islamic rating agency, which has been at the helm of Islamic business for about 18 years. Winner of the Best Islamic Rating Agency 2014 by the prestigious Global Islamic Finance Awards (GIFA), MARC is a truly global Islamic rating agency with an impressive track record. Its CEO, Mohd Razlan Mohamed, is considered a key player in the Malaysian Islamic financial services industry. In this interview, we ask him to share with us his experiences and the success story of his business.

Rating Islamic Financial Structures and Institutions

An Interview With

CEO of MARC

MOHD RAZLAN MOHAMED

MALAYSIAN RATING CORPORATION BERHAD

39


INTERVIEW

Please tell us about MARC, what it is, what it aims for and what are the different segments within it.

Malaysian Rating Corporation Berhad (MARC) is a Malaysian domestic credit rating agency. The agency commenced operations in 1997 as the country’s second domestic credit rating agency to provide local bond issuers and investors an alternative for their credit rating requirements. As Malaysia continued to stay on its high economic and industrial growth path during the mid-nineties, demand for debt capital market funding also grew in tandem with the banking system to satisfy our country’s developmental and corporate funding needs. While issuers sought credit ratings to improve the marketability and pricing of their securities, institutional investors relied on rating agencies’ independent assessments of credit risks to augment their own credit analyses.

MARC was established to meet the increasing supply of and demand for rated debt securities in tandem with the growth in Malaysia’s local-currencyRinggitbondmarket.Localfinancialinstitutions from the insurance and investment banking sectors became shareholders of MARC. The Malaysian sukuk market took off from 2002 onwards. These Shari’a-compliant instruments continued to gain prominence as can be seen from the increasing size and diversity of sukuk structures in the market, providing MARC the opportunity to provide its expertise in the rating of asset-based sukuk. We are proud of the fact that our hard work and perseverance have rewarded MARC with the recognition of being the ‘Best Islamic Rating Agency for 2014” by Global Islamic Finance Awards- GIFA.

MARC’s rating coverage extends to corporate finance,includingfinancialinstitutionsandinsurance,structuredfinance,publicfinance,andinfrastructureandprojectfinance.MARCalso publishes independent assessments of the creditworthiness of securities and issuers, providing investors with an independent source of opinion and research.

MARC’s vision statement, “Provider of Trusted Insights on Risk”, encapsulates our primary aim, focus and objective as a key information intermediary in the capital markets. Our passion to deliver our vision keeps us ticking. We take pride in delivering independent views and value-added insights on credit risk, which helps to reduce information asymmetry in a debt market context. Insightful credit opinions have a particularly important function in the current age of information overload.

Please tell us your ownership structure and who are your shareholders?

MARC is capitalised at RM20 million. We have a fairly diverse shareholder base comprising 29 institutions from major insurance companies, stockbrokers, and some investment banks in Malaysia.

Please share with us who are your clients? And how have you assisted them?

MARC has provided ratings on a wide range of Shari’a-compliant issuances by both domestic and foreign companies in the

Ringgit-denominated sukuk market. MARC’s rating coverage extends to corporate and structuredfinancesukuk,projectfinancesukukand Shari’a-compliant banking and insurance institutions.

MARC has completed 721 ratings, accounting for about USD140.6 billion (RM450 billion) in issuance value as of 30 November 2014. Over the years, MARC has rated many innovative sukuk instruments and structures. Among the notable sukuk that are rated by MARC include:

40


INTERVIEW

• Projek Lebuhraya Usahasama Berhad’s (PLUS) USD7.3 billion (RM23.35 billion) Sukuk Musharaka Programme, an acquisitionfinancingofaportfoliooftollroads in Malaysia, issued in 2012 remains to date the largest rated sukuk issuance by a single entity in the world.

• Aman Sukuk Berhad’s USD3.1 billion (RM10.0 billion) Islamic Medium Term Notes Programme, an innovative public-privatepartnership(PPP)financeinitiativefor the development of the Malaysian police force facilities.

• Malakoff Power Berhad’s USD1.7 billion (RM5.4 billion) Sukuk Murabaha

Programme,anacquisitionfinancingofaportfolio of independent power producers in Malaysia.

• CIMB Islamic Bank Berhad’s USD1.6 billion (RM5.0 billion) Basel III-compliant Tier 2 Junior Sukuk Programme

• Sime Darby Berhad’s USD1.4 billion (RM4.5 billion) Islamic Medium Term Notes Programme

• TNB Western Energy Berhad’s USD1.3 billion (RM4.0 billion) Sukuk

• Petronas Dagangan Berhad’s RM2.0 billion Sukuk Murabaha Islamic Commercial

Papers and Islamic Medium Term Notes Programme

How are you different to other rating agencies like Moody’s etc., do you have an edge over them and how?

We are a full-service rating agency like the global rating agencies. However, our focus is on our home market and the ratings that we providearestrictlyconfinedtotheMalaysiannational rating scale. The international rating agencies have a dominant presence in the international market and assign ratings on an international rating scale, in addition to local and regional scales in certain markets. Since itsinception,MARChasaccumulatedover18years of experience in rating domestic entities and issues. Over the years, we have acquired a strong understanding of the local market and the industry dynamics and trends, which helps us to incorporate credit-related information from many sources into cohesive and forward-looking credit opinions. This gives us a home ground advantage in local corporate ratings.

You have worked on more than USD140 billion of issuances in oil and gas, plantation, infrastructure, power generation, construction, banking and finance, please share with us what are the most exciting projects MARC has worked on?

Our mandate to rate Projek Lebuhraya Usahasama Berhad’s (PLUS) USD7.3 billion (RM23.35 billion) Sukuk Musharaka Programme, issued in 2012 for the purpose of part-funding the acquisition of the selected Malaysian tolled expressways concessions and the Penang Bridge concession as well as to fund a planned capital spending, has to be one of the frontrunners in our list of most exciting projects we have worked on. Indeed, this programme remains to date the largest rated sukuk issuance by a single entity in the world.

We are also proud to have rated various high-profilepower-relatedissuancesin2013,includingMalakoffPowerBerhad’sRM5.58billion Sukuk Murabaha Programme for refinancingandworkingcapital,TNBNorthernEnergy Berhad’s RM1.625 billion issue of Islamicsecuritiestofinancethedevelopmentofagreenfield1,071.43-megawattcombined-cycle gas turbine power plant in Seberang Tengah, Pulau Pinang, and Kapar Energy Ventures Sdn Bhd’s RM2.0 billion Sukuk Ijarah forworkingcapitalandtorefinancetheIssuer’soutstanding Bai’ Bithaman Ajil Islamic Debt Securities.

You have also rated some of the sovereigns. Please share your

41


INTERVIEW

experiences. Further, how rating a sovereign is different? Share how you would rate a sovereign and what are the important factors.

MARC has assigned sovereign ratings to India (AA), Malaysia (AAA), South Korea (AAA), Indonesia (AA-), Singapore (AAA), Kuwait (AAA) and Hong Kong (AAA) since 2012.

The assignment of sovereign ratings entails going through the usual mill of soliciting feedback from the relevant authorities. However, given the potentially sensitive nature of this category of rating, government authorities would understandably be cautious inscrutinisingourratingfindings,withsometaking considerably more time than others for this endeavour.

The rating of sovereign governments involves an analysis of relevant quantitative and qualitative factors. The quantitative analysis is dominated by macroeconomic analysis, which includes an analysis of the country’s economicstrengthandprospects,itsfiscalsustainability and the sovereign’s debt burden. Data for this analysis is often readily available from the relevant central bank and/or government entities such as the Ministry of Finance or the entity responsible for collating anddisseminatingofficialstatistics.Wherereadily available, MARC also obtains data and information from credible international entities such as the International Monetary Fund, the World Bank and the Asian Development Bank.

Qualitative analysis, on the other hand, is far more complex. It requires an in-depth understanding of the sovereign’s history, demographics, political and international environment and socio-economic trends. A sovereign credit rating is not only an assessment of the sovereign’s ability to pay, which is covered by the quantitative analysis, but it is also an assessment of a sovereign government’s willingness to repay in a full and timely manner. Ascertaining the willingness to pay would require drawing inferences to a sovereign government’s motivations, which can beinfluencedbymultiplefactorsthatattimesmay not be readily determined.

Receiving credit rating is vital for a company to raise funds effectively, please share with us some of the most exciting issuances you have worked on in Islamic banking and finance and how much of your portfolio is Shari’a compliant.

Among MARC’s key initiatives to support the growthanddevelopmentofIslamicfinanceareintroducingthefirstsetofShari’a-basedrating

scalesandratingtheworld’sfirstglobalsukuk,Kumpulan Guthrie Bhd’s USD150 million Sukuk Ijarain2002.Theworld’sfirstsukukusingtheMusharaka structure valued at USD694 million (RM2.5 billion) by Musyarakah One Capital Bhd in 2005 was also rated by MARC. Since then, MARC has provided insights on sukuk rating through our publication entitled Rating Approach to Sukuk: A MARC Perspective which has become a key reference for sukuk investors and issuers.

Additionally, MARC’s rating offering introduced in 2010 called “Islamic Financial Institution Governance Ratings”, provides a structured assessment of the quality of institutional governance,acknowledgingthesignificantroleplayedbygovernanceinanIslamicfinancialinstitution. In support of Islamic Development Bank’s (IDB) initiative to create a sustainable and dedicated Islamic credit rating institution, MARC has remained, since 2011, a committed technical partner to IDB-initiated Bahrain-based Islamic International Rating Agency.

Personally, a memorable issuance to me would be CIMB Islamic Bank’s Tier-2 Junior Sukuk Programme of up to RM2.0 billion in nominal value, which was admitted to the main market of Bursa Malaysia in December 2009 under an exempt regime. This listing was touted as a potential precursor to the development of a vibrant retail sukuk market tradeable on Bursa Malaysia, and MARC is pleased to have been a part of that milestone by assigning an initial rating of AAIS, which is one notch lower than MARC’sassignedlong-termfinancialinstitutionrating on CIMB Islamic of AA+.

During the recent financial crisis a lot of sovereigns as well as companies were affected, please share with us how did MARC deal with this difficult period.

We kept our communication lines open and interacted heavily with investors and regulators, elaborating on and clarifying our rating methodologies to yield greater appreciation for the value we create as a rating agency.

Aside from actively marketing our latest products, our non-rating activities like subscriptions and public training contributed to income for the year.

Razlan, you have been CEO of MARC since 2007, tell us how different MARC is now from when you started?

Our rating universe has become more diverse in terms of client/entity mix, types of securities and transactions and ratings (corporate,

structured,projectfinance,sovereign,financialinstitution) since I came on board in 2007. Thesechangesreflectthedeepeningandmaturing of Malaysia’s debt capital markets over the years and MARC’s efforts to move with the times, adapt and innovate. As a rating agency that is committed to providing timely and reliable credit opinions, it is crucial to stay abreast of such changes by purposefully implementing capacity development efforts. Over the years, MARC has made its rating processmoretransparent,refinedandfine-tuneditsratingmethodologytoensureconsistency in its application and more robust outcomes. Going forward, MARC will continue to undertake these efforts; in addition, plans are afoot to launch new rating products such as corporate governance ratings, fund ratings and SME ratings.

What are the short-, medium- and long-term plans of MARC? Are there any plans to open offices outside Malaysia?

In light of the government’s move to liberalise the local credit rating industry (removal of mandatory credit ratings for tradeable bonds/sukuk from 1 Jan 2017), our priority is to continue promoting the relevance of credit ratings. At MARC, we do believe that there will still be demand for independent credit assessments post-2017, especially in times of increasing volatility in the global economy and financialmarkets.Inaddition,wewillcontinueboosting revenue generation from non-rating activities like public training and subscriptions. We will also enhance the skill levels of our quant team to enable MARC to take on technical advisory jobs. We are also open to explore opportunities to extend our expertise abroad.

Higher Institutions’ Centre of Excellence (HICOE)

Global Accounting Research Encourages Innovation and Good Governance in Islamic FinanceThe Accounting Research Institute (ARI) of Universiti Teknologi MARA, won the GIFA

Award 2014 under the category "Best Islamic Finance Education Provider". This is a

global recognition of ARI’s initiative in leading research in the niche area of Islamic

Finance and Financial Criminology. Speci�cally, the award is directly linked to ARI's

three research projects namely Islamic Micro�nance, Islamic Corporate Social

Responsibility (iCSR) and Integrity & Syariah Audit.

ARI which was �rst formed in 2002 as a special interest group has further evolved to a

research centre in 2005 and later recognised in 2009 by the Ministry of Education of

Malaysia as a National Higher Institution’s Centre of Excellence (HICoE). As a HiCOE,

ARI aspires to become a leading international research center focusing on its niche

research in Islamic Financial Criminology (IFC). Whilst Islamic Finance research focuses

on developing new products in Islamic Finance; research in �nancial criminology

explores on techniques to mitigate �nancial fraud. IFC centres on the belief that the

healthy growth of the Islamic Finance sector is ensured when new Islamic Finance

products continued to be developed and the sector is protected against the

possibility of �nancial leakages.

Website: ari.uitm.edu.my | Blog: accounting-research-institute.blogspot.com/

AWARD WINNER

43

Higher Institutions’ Centre of Excellence (HICOE)

Global Accounting Research Encourages Innovation and Good Governance in Islamic FinanceThe Accounting Research Institute (ARI) of Universiti Teknologi MARA, won the GIFA

Award 2014 under the category "Best Islamic Finance Education Provider". This is a

global recognition of ARI’s initiative in leading research in the niche area of Islamic

Finance and Financial Criminology. Speci�cally, the award is directly linked to ARI's

three research projects namely Islamic Micro�nance, Islamic Corporate Social

Responsibility (iCSR) and Integrity & Syariah Audit.

ARI which was �rst formed in 2002 as a special interest group has further evolved to a

research centre in 2005 and later recognised in 2009 by the Ministry of Education of

Malaysia as a National Higher Institution’s Centre of Excellence (HICoE). As a HiCOE,

ARI aspires to become a leading international research center focusing on its niche

research in Islamic Financial Criminology (IFC). Whilst Islamic Finance research focuses

on developing new products in Islamic Finance; research in �nancial criminology

explores on techniques to mitigate �nancial fraud. IFC centres on the belief that the

healthy growth of the Islamic Finance sector is ensured when new Islamic Finance

products continued to be developed and the sector is protected against the

possibility of �nancial leakages.

Website: ari.uitm.edu.my | Blog: accounting-research-institute.blogspot.com/

AWARD WINNERIslamic

Exchange Traded Funds

(ETF)

TALKING POINTS

A Financial Innovation

Exchange Traded Funds (ETFs) emerged as oneofthemostinnovativefinancialmarketinstruments of the 20th century and have provided investors the advantage of risk diversification,indextracking,all-daytrading,strategictradingcapability,taxefficiency,lowest fees, and transparent holdings (Carty, 2001).AccordingtoFerri(2008),ETFsmarkedan imperative investment revolution that began in1924withthefirstopen-endmutualfundoffering. In the wake of the market crash of 1987,andbyrequestofthelawfirmofLeland,O’Brien and Rubinstein, the U.S. Securities and Exchange Commission started reviewing and rewriting securities regulations to facilitate a novel kind of exchange-traded vehicle. In 1990, the SEC issued the Investment Company Act ReleaseNo.17809,whichultimatelypavedthe way for the formation of mutual funds that allowed for share creation and redemption duringtheday(Ferri,2008).In1993,ETFswerefirstintroducedintheU.S.byStateStreetGlobal Advisors to track the S&P 500 index (Carrel,2008).

ETFs are listed and therefore their units can be bought and sold anytime during stock exchange trading hours. Investors buy and sell ETF units through their stockbroker rather than through unit trust agents. Most ETFs are passively managed index funds although there is ongoing work being done to create enhanced and actively managed ETFs. In the managing of index funds passively, managers do not pick stocks based on fundamental analysis. Instead, managers aim to track the performance of a benchmark index.

ETFsareassumedtobemorecostefficientthan actively managed mutual funds due to their passive investing character. They are alsomorecostefficientcomparedtomanyopen-ended index mutual funds. In a study conducted by Dellva (2001) , compared the expense components of Standard & Poor’s Depositary Receipts (SPDRs) and Barclay’s iShares S&P 500 from the bundle of ETFs and the Vanguard index mutual fund. The author exhibitsasignificantadvantageofETFswithrespect to annual expenses, even though they experience transaction costs, commissions

paidtobrokeragefirmsandimpactedbythe bid-ask spread effect. Bernstein (2002) contradicts Dellva (2001) by claiming that the cost advantage of ETFs are diminished by the trend of investors who liquid their shares very frequent.

WiththerapidgrowthofIslamicfinance,therehas been an emergence of Shari’a compliant ETFs which seek to provide investment opportunities beyond the existing pool of investment for Muslim investors and ethical investors as part of its integration process intotheinternationalfinancialsystem.Whilethere had been unprecedented growth of the conventional ETFs, Shari’a compliant ETFs found their rightful place only in February 2006 when the Dow Jones Islamic Market (DJIM) Turkey ETF was listed on the Istanbul Stock Exchange to track the performance of the DJIM Turkey Index. IShares one of the dominant force in global ETFs, with over $620bn invested in 474 funds which account for 43.0% of the world’s total ETFs assets (Blackrock, 2011), launched three Islamic funds in December 2007 on the London Stock

Dr. Nafis Alam, Associate Professor, Nottingham

Unversity Business School (NUBS)

44


Exchange amid an increasing shift by ETFs providers to offer alternative investment products. The three funds were primarily aimed at European investors with share classes in sterling and US dollars.

Islamic ETFs and conventional ETFs share common characteristics. The main difference between a conventional ETF and an Islamic ETF is the benchmark index that the Islamic ETF tracks. An Islamic ETF tracks a benchmark index comprised wholly of constituent securities which are Shari’a compliant whereas a conventional ETF may track any benchmark index regardless of the Shari’a status of its constituents. In addition, an Islamic ETF is managed under the Shari’a principle and guidelines, and overseen by an appointed Shari’a committee. The Shari’a committee conducts regular reviews and audits on the Islamic ETF to ensure strict compliance with the Shari’a principles and practices.

The following diagram depicts the general structure of an Islamic ETF:

Islamic ETF can be the next big thing for Islamic capital market after the sukuk which has made inroads in the global Islamic capital market landscape. One of the most developed Islamic capital market, Malaysia has two Islamic ETFs withamarketvalueof$98.8million,takingthenation’s total ETF to six which is worth $320 million. In Malaysia, Islamic ETF covers 31.5% of the total EYF market. (http://www.sc.com.my/data-statistics/islamic-capital-market-statistics/)

MyETF-DJIM25,Malaysia’sfirstShari’acompliantETFlaunchedinJanuary2008,tracks the Dow Jones Islamic Market Malaysia Titans 25 Index as a benchmark index which is amarketcapitalisationweightedandfree-floatadjusted index provided by S&P Dow Jones through the License Agreement.

The Benchmark Index consists of 25 Shari’ah-compliant securities of companies listed on Bursa Malaysia Securities Berhad, weighted by market capitalisation. The universe for selection of the components of the Dow Jones Islamic Market Malaysia Titans 25 Index includes all equities in the Dow Jones Islamic Market Malaysia Index, and index comprised of Malaysia-based companies that comply with the methodology established by S&P Dow Jones for screening stocks to comply with the Shari’a principles. (www.myetf.com.my)

Globally, Islamic ETF even after almost a decade in service, assets account for less than one percent of the total $2.3 trillion ETF market. Recently, Islamic ETF got a big boostwhentheU.S.fundmanagementfirmFalah Capital LLC set up its inaugural Shari’a-compliant ETF to tap growth in Islamic banking

assets. While, the iShares MSCI Emerging Markets Islamic UCITS ETF was the best-performing fund in the last quarter of 2014, delivered a 10 percent return, according to data compiled by Bloomberg. The iShares MSCI USA Islamic UCITS ETF was second best at 9 percent. (http://www.bloomberg.com/news/2014-10-21/etfs-lag-2-3-trillion-market-as-options-scarce-islamic-finance.html)

In a recent study conducted by Alam (2013) to look into the comparative performance of Islamic and conventional ETF By making useof85ETFsfromUKiSharesbetween2008and2011,itwasfoundthatIslamicETFs can beat both the conventional ETFs and market benchmark index based on risk-adjusted performance measures. Overall both ETFs were able to outperform the market benchmark index. It was also evident that a portfolio of Islamic ETFs shows less variability and hence is less risky compared to their conventional counterpart. (http://www.palgrave-journals.com/jam/journal/v14/n1/abs/jam201223a.html)

For Islamic ETFs to catch up with conventional ETFs, it needs to be fully cost-effective and needs to reach an optimal size but none of the current Islamic ETFs have assets of more than $100 million whereas bigger conventional ETFs control funds of few hundred billion. Islamic ETFisaninnovativefinancialproductwhichhasan appetite in a GCC , Europe and Malaysian market but it needs a long way before it catches

up with conventional ETF.

Dr.NafisAlamisanAssociateProfessoratthe Nottingham University Business School (NUBS) in the University of Nottingham - Malaysia Campus (UNMC) and Director for the Centre for Islamic Business and Finance Research (CIBFR). He has published quite extensivelyintheareaoffinanceandhisscholarly research has featured in leading journals like Emerging Markets Review, Journal of Asset Management, Journal of Banking Regulation, Journal of International Banking law & Regulation, Review of Islamic Economics; Journal of Internet Banking and Commerce and Journal of Financial Services Marketing among others. He also coauthored three books in Islamic Finance among them is Encyclopedia ofIslamicFinancewhichisfirstofitskindandhas sold over 1000 copies worldwide. Dr. Alam is also Visiting Lecturer for Durham Islamic Finance Summer School, Durham University, UK.Heisreviewerforleadingfinance&Islamicfinancejournals.HehasalsoparticipatedinleadingIslamicfinanceconferencesworldwideamongthemsignificantwasparticipationinHarvard Islamic Finance forum at Harvard Law School and Gulf Research Meeting at Cambridge University, UK.

RecentlyNafiswasfeaturedasProfessoroftheMonth by Financial times.

Buyer Seller

Stock Exchange

ETF Shares

ETF Shares Securities

Secondary

Primary Market

Authorized Participants

Islamic ETF Provider Shari’a Advisory Committee

Shari’a Advisory Matters

What kind of education did you have when you were growing up?

I spent 11 years of my primary and secondary education at the Convent Bukit Nanas primary and secondary schools in Kuala Lumpur. After my SPM examination (equivalent to the ‘O’ levels), I left for the USA and completed my BBA degree from Loyola Marymount University in Los Angeles. I returned to Malaysia to work for a few years and then proceeded to do MBA at the Australia Graduate School of Management in Sydney in 2000.

Who was your mentor?

Idonothaveanyspecificindividualmentor. During the span of my 22 year career, I have been fortunate to work under some very good and enterprising companies and bosses in the business. The different experiences have provided me with very good foundation for my leadership role.

How would you describe your managerial style?

Consultative. I believe in teamwork and will seek the views of the relevant parties involved before making the appropriate decisions.

Ambition or talent: which matters more for success?

Ambition. I have seen talented people’s careers stall as they were not driven or hungry enough to work hard and push themselves to succeed. Someone once said to me “It’s not where you start, but where you end that matters” and there’s a lot of truth in that statement.

What was your earliest ambition?

To be a lawyer

In what place are you the happiest?

Surrounded by family and good friends

What ambitions do you still have?

To grow Amundi Islamic to be a leading and preferred Shari’a-compliant asset manager globally.

What drives you on?

To be successful at a given task or goal

What is the greatest achievement of your life so far?

Being a pioneer staff and spearheading Amundi’sMalaysianofficeatthestartofitsoperationsin2008andgrowing, both conventional and Shari’a-compliant, into one of the largest foreign owned asset managers in Malaysia.

What has been your greatest disappointment?

In the development of Shari’a-compliant investments, I have been disappointed by the slow speed of some large institutions in Muslim majority countries to invest in Shari’a-compliant investments.

What do you do in your spare time?

I read to keep up to date with the current events in the world and financialmarkets.

If you had to rate your satisfaction with your life so far, out of 10 what would you score?

I am blessed to live a comfortable life surrounded with good friends and caring family. There’s more I can achieve career wise so I guess that’s where the dissatisfaction lies.

If your 20 year’s old self could see you now, what would she think?

She would be very impressed with how I have progressed in my career. I wasn’t a particularly ambitious 20 year old and only became career-driven when I started working and seeing the successful results of my work.

How committed are you to Islamic banking and finance?

As I said earlier, one of my ambitions is to see Amundi’s Shari’a-compliant asset management business grow into a global leader and asset manager of choice. Amundi Islamic Malaysia is Amundi’s global hub for Shari’a-compliant asset management and global sukuk investments, so it has the support of the Amundi group to grow it into a leading global player. Being the country head responsible for the growth of this business, I am very committed.

Roslina Abdul RahmanManaging Director, Amundi Malaysia Sdn Bhd


PERSONALITY

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ISLAMIC FINANCE REVIEW | MARCH 2015 CURRENT ARTICLE

46

Banks and Financial Institutions (IBFIs)

Specific Risks Facing Islamic

Yousuf Siddiqui, Senior Manager Shari’a Structuring, Emirates Islamic

TALKING POINTS

47


Besides standard risks that Islamic as well as conventional banks face and manage, there areotherrisksthatarespecifictoIslamicbanks. Some of these risks are entirely new (like commercial displacement risk) and others are new yet fall under existing categorization of risk (like credit risk, market risk and interest raterisketc.).TheserisksarespecifictoIslamicbanks with respect to the Shari’a compliancy requirements. Hence, these could be treated asspecificoperationsrisksfacedbyIBFIs.Although these risks may prove fatal in some extreme cases, the management of IBFIs and their consultants so far have failed to emphasisesufficientlyontheirimportance.

Islamic banks would be exposed to these specificrisksduetoanumberofreasons,including the issuance of certain Shari’a resolutions by its own Shari’a supervisory committee and/or that of a national Shari’a advisory body (or even an individual Shari’a scholar), issuance of new guidelines by a central bankoranotherfinancialregulator,orduetoissuance of unfavourable decisions by a court of law. In such a scenario, one must expect an adverseimpactonprofitsandrevenuesoftheconcerned Islamic bank.

On the other hand, on a lighter note, an Islamicbankmaybeexposedtoaspecificrisk due to customer defection or customer dissatisfaction. If such a situation arises then this might result in negative marketing (i.e., word of mouth) and if remained unchecked for a long period then it could lead to permanent loss in the market share.

We focus on some of the most important risks specifictoIBFIs.

FACTOR 1: RISK OF UNDERLYING ASSETMostofthefinancingtransactionsinIBFarebased on selling or leasing of an underlying asset. In fact, bearing the risk of ownership of an underlying asset entitles an IBFI to claim revenues generated from the sale of theunderlyingasset.ThespecificriskthatanIBFI faces is a possible or potential loss of the underlying asset prior to execution of sale/lease contract. According to Shari’a, an IBFI can claimanyamountofprofitprovideditbearstherisk of the underlying asset at the time of selling or leasing the same.

As per Shari’a rulings, Islamic banks cannot sell an asset before getting the risk of the underlying asset transferred to itself. For example, if an Islamic bank buys a car from a dealer and if anything goes wrong with the car prior to executing an auto murabaha contract then Islamic bank has to bear the loss. Similarly,insharesfinancing(asasubstituteto

personalfinancing),Islamicbankisexposedtohigh degree of price risk in case the customer rejects or defaults in signing the murabaha or musharaka of shares. Such kind of risk could be mitigated through various risk minimisation methods. The most common risk mitigation in this respect is to ensure that the Islamic bank (as seller) executes sale of the underlying asset to the customer (as buyer) in the fastest possible time. Obtaining customer’s acceptance through implied consent would facilitate Islamic bank to transfer such kind of risk at the fastest possible way.

As per Shari’a rulings, deferment of risk transferforaspecificassetisnotpermissible.For example Islamic bank cannot agree to sellaspecificassettodaywheretheriskwillbe transferred after one month. This could be addressed through timing of risk where execution of the sale of the underlying asset is scheduled only when the seller is willing to part away from the underlying asset.

As per Shari’a rulings, once risk of the underlying asset is transferred to the customer (as buyer) then the Islamic bank (as seller) has no Shari’a right of reselling it to other party or thesamebuyeratprofit.HencemanyIslamicbank face losses when murabaha customers delay in settling their payments by few months. Islamic banks do not wish to qualify such delay as events of default but still they suffer losses duetofixingthepriceofmurabaha.Thiscouldbe mitigated through appropriate pricing of risk whereby the Islamic bank (as seller) has to agree on the best rate of return/yield at the time of transferring the risk to the customer (as buyer).

FACTOR 2: SPECIFIC CREDIT RISKCreditriskspecifictoIslamicbankscanbedefinedasthefinanciallossthatanIBFIsufferswhen a customer defaults. In conventional banking, when a customer is late on payments, thelenderbenefitsintermsofdefaultpenaltyand the additional interest that the customer has to pay to bring their account in order. In some cases, delay in payment is expected and welcomed,asitbringsadditionalbenefitstothe lender (as is the case in the credit card business wherein credit card provider actually awaits a transactor to become a revolver). As default penalty is not allowed in IBF, and where itisimposed,thefinanceprovidercannotbenefitfromitexcepttotheextentofthedirectadministrative costs associated with it, the credit risk for IBFIs includes additional loss of income due to default.

Generally, customers of Islamic banks have twokindsoffinancialobligations:a)debtsettlement; and b) periodic purchase or lease.

In debt settlements (for example settling

dues of murabaha, istisna’ and salam, etc.), the customer has to settle the outstanding financialobligationirrespectiveofavailabilityornon-existence of the underlying asset. Hence, if a car sold on a murabaha basis is destroyed, even then the due price has to be paid by the customer. However, on the downside, Islamic bank cannot claim any extra returns over the contracted sale price or the outstanding debt. Forexample,duringfinancialcrises,IslamicbanksinDubaihadtosticktothecappedprofitamount agreed upon at the time of executing murabaha. This incurred heavy losses to anumberofIslamicbanksthatfinancedproperties under construction, which got delayed on delivery. This is a major risk facing IBFIs using murabaha as a dominant tool of financingintheirbusiness.

This is one of the reasons that an increasing number of IBFIs have now started preferring othermodesoffinancing,whichofferflexibilityin the wake of an adverse event. One solution that has been in practice in some countries is the use of periodic purchases and sales contracts. Ijara-based leasing is another risk mitigation tool. In cases of periodic sales and leases, returns for the coming periods can be adjusted to compensate the Islamic bank for loss due to customer’s default or changing financialconditions.Forexample,incaseofijara, it is possible to increase the rent of the subsequent months, followed by a default on part of a customer. Similarly, in case of a periodic sale contract, the sale price can be increased in subsequent sales if a regular customer happens to default on a particular obligation.

However, it should be noted that there is a possibilityoftrade-offbetweenspecificcreditrisksandthespecificrisksarisingfromtheownership of the underlying assets. While moving to ijara-based products may help in reducing credit risk, it is expected to increase the risks associated with the underlying assets. Similarly, moving to multiple and periodic sales to mitigate credit risk is also expected to increase likelihood of operational risk (in terms of mistakes, errors and omissions by the bank’s personnel).

Given this trade-off, care must be exercised to decide on the contract choice, and other factors like price volatility, customer’s credit history, and the expertise level of the bank staff must also be taken into account. If, for example, downward price volatility is the dominant factor, then one-off murabaha transaction may be a better choice. If, however, customer’s default is likely (and is still within the acceptable risk threshold), then periodic sales and ijara contracts may be more feasible. If, on the other hand, an IBFI faces excessive incidence

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of operational risk, simple one-off murabaha transactions may be preferred.

FACTOR 3: RISK OF HUMAN CAPITALAllbanksandfinancialinstitutionsfacepeoplerisk, which is categorized under operational risks. In case of IBFIs, this risk has an additional dimension, given the Shari’a compliancy requirements. After all, IBF is driven by Shari’a sensitivity of customers. If IBFI customers perceive employees of such institutions less than committed to IBF, this will adversely affect their patronage and custom.

In recent times, a number of Islamic banks in the Middle East have suffered losses due to irregularities in operations and inadequacy of policies adopted by the top management that was not particularly committed to Islamic banking. Similarly, all the Islamic banks set up in UK had CEOs who came from non-Islamic background. These CEOs were gradually replaced with Muslim CEOs who are seen more favourablybytheusersofIslamicfinancialservices. A number of Shari’a boards advise their banks to choose pious Muslims to lead their businesses, an advice that has not been taken seriously in many cases though. In South Africa, there has been at least one case where a top manager of Islamic banking operations was found to be involved in activities that were questionable from a regulatory perspective. Consequently, shareholders of IBFIs in Africa have now adopted a cautious approach in deciding top leadership of such institutions.

In Malaysia, now there is an implicit understanding that the central bank will approve only Malay Muslims to lead Islamic banks and takaful companies as CEOs. This is, however, not so far the case when it comes to appointments in the Islamic capital market wherein Securities Commission Malaysia has yet to adopt such an implicit approach to manageriskofhumancapitalspecifictoIBFIs.

In the wake of Islamic banking making its route to new markets like East Africa where local expertise in Shari’a structuring, development and audit is highly uncommon, IBFIsareexpectedtothisspecificrisk,atleast at the initial stage of development of IBF therein. This is a real challenge faced by IBFIs in the new jurisdictions where they face acute pressure from their conventional counterparts. Incapable, inadequately qualifiedorlesscommittedhumanresourcesinsuchinstancesfinditdifficulttoovercomecompetition pressure through structuring innovative products and adopting processes and procedures that favour IBF. Many industry observers believe that credibility of Islamic banks with less committed workforce will adversely impact their Shari’a identity and

branding.

As a general remedy to human resource relatedspecificrisksfacedbyIslamicbank,HR departments of Islamic banks should make more serious efforts to raise the standards for those who are willing to join Islamic banking through recruitment, localization and continuous learning and development initiatives. In a study on top Islamic banking brands, Meezan Bank’s employees were found to be most loyal to their bank and its brand (see the previous issue of ISFIRE for further details), and there is a need to study Meezan Bank’s approach to human resource development.

FACTOR 4: MARKETING RISKSpecificriskofmarketingfacedbyIslamicbanksisrelatedtothepossiblefinancialand reputational suffered due to following inappropriate marketing tools in promoting Islamicfinancialproducts.Thisincludesusageof conventional terminology in verbal and written communication.

Legal documentation and marketing material with conventional terminology might lead toshakingShari’aBoard’sconfidenceinthetrue essence of products offered by Islamic banks. Also, the personnel using conventional terminology will add doubts to the customers’ minds about Shari’a credibility of Islamic banks and the products offered by them.

Similarly using inappropriate means of promotingIslamicfinancialproducts(likethrough music channels or cinema halls) could force Shari’a boards to take severe and unfavourable measures.

As a general remedy to risk faced by Islamic

banks due to improper marketing efforts, serious thoughts should be given by the marketing departments of Islamic banks to give a positive and vibrant image of the Islamic banks, which can attract a larger market share. Moreover engaging Islamic banks in sponsoring Islamic conferences and charitable causes have proven to be a positive step to mitigate any risk of negative marketing.

FACTOR 5: STATUTORY AND LEGAL RISK SpecificriskofstatutoryandlegalriskfacedbyanIFBIistheriskoffinanciallossduetobeingsubjected to certain regulatory frameworks or unfavourable decision in a court of law.

Except in a few countries (notably Malaysia), the laws of land do not recognize Shari’a principles and rulings as acceptable and applicable governing law for commercial and financialtransactions.ThismeansthatIslamicfinancialtransactionsbecomesubjecttoconventional in the event of a dispute. This is particularly true when the legal documentation clearly stipulates a conventional law, e.g., the English law, as the governing law of the transaction.

Furthermore,manyIslamicfinancialtransactions are governed by complex lengthy documentations, which may in many instances be not understood by judges (who are not well-versed in the Shari’a law) in the conventional courts. It may also be the case that legal documentation may have gaps and important exclusions, especially if they are preparedbylawfirmsnotfullyexposedtotheShari’a requirements, or those documentations thatarenotproperlyvettedbyqualified

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Shari’a advisors. If so, it is very likely that the transaction would be deemed null and void from a Shari’a viewpoint, in case of a dispute going into a law of court and the judge requires an independent Shari’a opinion on the transaction. In such a case, the court will have no option but to adjudge the case from a pure conventional viewpoint. IBFIs in this circumstancearelikelytoincurfinanciallosses.

SpecificriskfacinganIBFIinthecontextofregulatory framework may be understood in the context of liquidity management. In many jurisdictions, Islamic banks do not have access to Shari’a compliant instruments to manage their liquidity requirements. While conventional banks may have access to a variety of instruments like repos and T-bills, IBFIs may have to resort to expensive bespoke arrangements for liquidity management. This is certainlyariskspecifictoIBFIs.

As a general remedy to the risks faced by Islamic banks due to statutory and legal factors, it should be ensured that documentation by Islamic banks’ legal departments are thorough and lean in order to cover all the Shari’a requirements to avoid being subjected to conventional rulings that are not in line with Shari’a principles. Also, Islamic banks should work more proactively on Shari’a compliant alternatives to the existing central bank’s conventionalproductstoavoidanyfinancialorliquidity risk.

CONCLUSION Risk management in IBFIs is a trick area, which is fast evolving with the increase in size andscopeoftheIslamicfinancialservicesindustry. So far, however, risk managers and policy and strategy personnel of IBFIs have taken into account only secular views of risks. Consequently, the risk mitigation and management endeavour by IBFIs have resulted in bringing product development in IBF closer to the conventional practices. A proper considerationofrisksspecifictoIBFmustresultin product development and structuring in favour of genuinely Shari’a compliant products thatfulfilIslamicrequirementsinletterandspirit.

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COMSATS Institute of Information Technology (CIIT) Lahore organized its third Global Forum on Islamic Finance (GFIF) at Pearl Continental Hotel Lahore on March 10-11, 2015. Delegates and speakers from around the world, including from UK, USA, Malaysia, Bahrain, Saudi Arabia, Germany, Lebanon, Canada and many more, attended the event. It was a well-organised conference for which the organisers must be congratulated. The rector of the university, Professor S. M. Junaid Zaidi, and Director COMSATS Lahore Campus, Professor Mahmood Ahmed Bodla, were instrumental in making the third Forum a huge success. The university’s top management should be appreciated for their strategic vision and spotting an opportunity in Islamic banking andfinance(IBF)fordevelopingacentreofexcellence in a niche market like this. There is no doubt that COMSATS has put Lahore on the global map of IBF.

There is more to GFIF than just creating a marketing gimmick. With the active engagement of COMSATS in IBF, the Institute has gained a central position in IBF on a national level. The likes of International Islamic University Islamabad (IIUI), which have traditionally been considered as torch-bearers of the movement of Islamic economics, banking andfinance,havebeeneclipsedbythisnewleadership role of COMSATS.

The Forum was attended by Saeed Ahmed, Deputy Governor of State Bank of Pakistan, who is also responsible for development of Islamic banking in the country as part of his leadership role at the central bank. There was active participation and support from Islamic Research and Training Institute (IRTI), a member of the Islamic Development Bank Group. Dr Zamir Iqbal, CEO of the World Bank Global Centre of Islamic Finance, was a

keynote speaker. Dr Akram Laldin, Executive Director of International Shari’a Research Academy for Islamic Finance (ISRA) also spoke at the conference. Ijlal Ahmed Alvi, CEO of International Islamic Financial Market (IIFM) also joined the speakers from Bahrain. Dr Imran Usmani and Mufti Zubair Usmani represented Darul Uloom Karachi. In this way, COMSATS succeeded in engaging major stakeholders in the third GFIF.

UnlikeKarachi,whichhoststhefinancialdistrict of Pakistan, Lahore is a more secure, less volatile and culturally richer city. A number ofbanksandfinancialinstitutions(e.g.,MuslimCommercial Bank, Allied Bank, the Bank of Punjab,FINCAMicrofinanceBank,andthePunjab Provincial Cooperative Bank) have their headquarters in Lahore. Lahore Stock Exchange provides a perfect substitute to the more vibrant and better-known Karachi Stock


Lahore as a Global Centre of Excellence for Islamic Finance?

PAUSE FOR THOUGHT

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ISLAMIC FINANCE REVIEW | WWW.ISFIRE.ORGPAUSE FOR THOUGHTS

Exchange. Being capital of the largest province of Punjab, with population of nearly 100 million, Lahore can be developed as a global centre of excellence for IBF.

In Karachi, Darul Uloom Karachi has played a lead role in developing the requisite human resources for the Islamic banking industry. In Lahore, COMSATS can play a similar role by developing its newly established Centre of Islamic Finance as a centre of excellence for the research and talent development for the Islamic financialservicesindustry.

Undoubtedly, Kuala Lumpur is the global capital of IBF, with numerous industry-building institutions like Islamic Financial Services Board (IFSB), International Islamic Liquidity Management Corporation (IILMC), International Centre for Education in Islamic Finance (INCEIF), International Islamic University Malaysia (IIUM) and International Shari’a Research Academy for Islamic Finance (ISRA). The key to success of Kuala Lumpur as a global centre of excellence for IBF is the staunch support of the government and the rolethatthecentralbank–BankNegaraMalaysia–hasplayedinthepromotionanddevelopment of IBF nationally as well as internationally.

Dubai is aggressively pitching itself as a global capital of Islamic economy. It boasts having the bestinfrastructureforthefinancialservicesindustry and linkages to the global Islamic economic routes. It has established a number of industry-level bodies like Dubai Islamic Economy Development Centre and Dubai Centre of Islamic Banking and Finance. Like in Malaysia, the key support to Dubai as a centre ofexcellenceforIslamicfinanceandeconomycomes from the government.

Bahrain–oncetheunchallengedleaderinIBF–hasslippedtothirdpositionintermsofits global standing as a centre of excellence in IBF. With the likes of Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), General Council for Islamic Banks and Financial Institutions (CIBAFI), International Islamic Financial

Market (IIFM) and the Islamic International Rating Agency (IIRA), Manama remains central to the global developments in IBF. The government’s commitment to IBF is crucial for the leadership role of Bahrain in the global Islamicfinancialservicesindustry.

The fourth centre of excellence for IBF is London. With numerous industry-building initiatives like Institute of Islamic Banking and Insurance, Islamic Bankers Association and UKTI’s lead role in the promotion of London as a hub of IBF, London remains central to developmentsintheglobalIslamicfinancialservices industry.

Istanbul is also fast emerging on the global map of IBF. The government of Kazakhstan is also promoting Almaty as a regional centre of excellence for IBF.

In this background, Lahore has a long way to claim to be a global centre of excellence for IBF. However, it has all the ingredients to become one such centre if the government of Punjab starts owning IBF and devises a strategytoattractIslamicfinancialcapitalfromaround the world. Issuance of sukuk can bring a lot of attention to Lahore, as the provincial governmentneedssignificantsumsofmoneyto develop infrastructure in the city and the province at large. The government of Punjab should study the issuance of sukuk by the German state of Saxony Anhalt that issued a 100 million euro sukuk in 2004. This landmark sukuk instantaneously put the state on the global map of IBF.

Although there is a need to look into this proposition in great detail but the following steps should be considered as a general guideline to make Lahore as a global centre of excellence for IBF:

1. The government of Punjab should start sponsoring GFIF as a premier conference in the global calendar of IBF;

2. State Bank of Pakistan should establish an endowed Chair in Islamic Finance at COMSATS to further strengthen Centre of Islamic Finance;

3. The provincial government should set up ataskforceheadedbyanIslamicfinanceexpert of international repute, with an objective to identify opportunities in IBF, which could be exploited to attract Islamic financialcapitaltotheprovinceingeneraland Lahore in particular;

4. Through a university like COMSATS, international linkages should be developed with other centres of excellence for IBF, notably Kuala Lumpur, Dubai, London and Bahrain; and

5. The provincial government should choose thecrucialareaofIslamicmicrofinancetodevelop Lahore as its global hub.

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MalaysiapioneeredtheIslamicfinanceindustryin many ways. Islamic banking, takaful, or sukuk, the country perpetuates to maintain its leading position in terms of market share and market growth. According to the forthcoming Global Islamic Finance Report 2015, Malaysia is maintaining its second position on the Islamic Finance Country Index (IFCI), second to Iran. WithUS$249billionIslamicfinancialassets(both in the formal and informal sectors) at the end of 2014, the country has grown its Islamicbankingandfinancemarketwithanaverage annual rate of over 20% between 2007 and 2014. The same report forecasts, Islamic banking assets of Malaysia will reach US $643 billion in 2019. Bank Negara Malaysia, the central bank of the country, aims to boost Islamic banking market share in local market to 40% by 2020, currently which stands at 20.7%. In takaful sector, Malaysia emerged as the world’s largest family takaful market. In terms of gross takaful contribution, however, Malaysia comes in the second position, only lagging behind Saudi Arabia, by representing 21.55% of forecasted total gross takaful contributions for 2014. The prospects for takaful industry in Malaysia are bright, with 22% growth rate. In sukuk issuance, Malaysia is the unparalleled global leader. Since 2012, the country’s share of new sukuk issuance has consistently been more than 60%. MIFC Insights reported in 2013 that Malaysia’s market share of global sukuk issuance was 69%.

The rapid growth and the optimistic outlook oftheIslamicfinanceindustryinMalaysiahave been made possible because of its comprehensiveIslamicfinancialsystemthatis supported by strong regulatory, legal, and Shari’a governance frameworks. The

enactment of Islamic Financial Services Act 2013 (IFSA) is a great leap ahead for Malaysian Islamicfinancialindustry.Malaysiaisamongthe countries that have well developed Islamicfinancialsystemthatpromotesthedevelopment of the industry. To be the global hubandtheleaderofIslamicfinanceisinitsnational agenda. Malaysia frequently hosts international events welcoming leading Shari’a scholars and industry practitioners. The country is also the founding member and the host country of Islamic Financial Services Board (IFSB) that sets international prudential standards and guiding principles to promote and enhance the soundness and stability of Islamicfinancialservicesindustry.

Nonetheless, amidst all of the achievements, challenge remains on adoption of unanimously acceptedfinancialreportingstandardsthatmust address the unique nature of Islamic financialinstruments.

Islamicfinancereferstoasystemthatcomplieswith the rules of Shari’a, also known as Islamic law. The underlying philosophy of Islamic financialinstrumentsisfundamentallydifferentthanthetraditionalfinancialinstruments.For instance, Islamic banking instruments are entrepreneurship and trade driven which resultsriskandprofitsharingbetweentheprovider of fund (investor) and the user of fund (entrepreneur). In contrast, traditional banking instruments are purely lending and borrowing arrangements whereby the borrower pays interest to the lender based on the amount and duration of borrowing. The differences in philosophies raise the question whether it is appropriateforIslamicfinancialinstitutionstoapply the same set of accounting standards that alsoapplyfortraditionalfinancialinstitutions.

Inrecentyears,therehavebeensignificantinitiatives taken towards international convergenceofasinglesetoffinancialreporting standards. The single set of standards aims to enhance comparability and understandabilityofthefinancialstatements,and increase cross-border investments. The convergence initiatives are being steered primarily by the International Accounting StandardsBoard(IASB)–theissuingbodyofInternational Financial Reporting Standards (IFRS). Many international organisations, including the G20, World Bank, IMF, Basel Committee, International Organization of Securities Commissions (IOSCO), and International Federation of Accountants (IFAC) has been publicly supported the convergence projects. At present, 114 jurisdictions in the worldrequireIFRS-basedfinancialreportingfor all or most of their listed companies and financialinstitutions.

Effective from 1st January 2012, non-private entities in Malaysia are required to apply Malaysian Financial Reporting Standards (MFRS), which is identical to IFRS, in preparing theirfinancialstatements.ThisbringsIslamicfinancialinstitutionsinMalaysiaunderprovisos of IFRS. Alongside Malaysia, the biggestIslamicfinancemarkets,suchasSaudiArabia and Dubai, also require or permit IFRS basedfinancialreportingforIslamicfinancialinstitutions.

IASB adopted principle based approach in developingitsfinancialreportingstandards.The Malaysian Accounting Standard Board (MASB) is of the opinion that MFRS can beappliedforIslamicfinancialinstrumentswithoutentailinganydifficulty,andtheapplicationofMFRSinfinancialreporting

Issues and Challenges

Mezbah UddinIndependant Scholar

Romzie RosmanInternational Shari’ah Research

Academy for Islamic Finance

Financial Reporting for Islamic

Financial Institutions in Malaysia:

TALKING POINTS

53


ofIslamicfinancialinstitutionsdoesnotsanctify or nullify the Shari’a validity of Islamic financialtransactionsasfinancialreportingisa recording function only. Therefore, MASB argues, development of a separate framework forIslamicfinancialinstitutionsisnotessential(AOSSG, 2010). On the other hand, the Bahrain based accounting standard setter for Islamicfinancialinstitutions–theAccountingand Auditing Organisation for Islamic Financial Institutions(AAOIFI)–establisheddifferencesinobjectivesoffinancialreportingbetweenan Islamic bank and a traditional “Western model” bank, and reasons that the accounting standards developed for traditional banks may not be relevant for Islamic banks. AAOIFI statesinitsobjectivesandconceptsoffinancialaccounting standards:

i. Islamic banks were developed on a foundation that does not permit the separation between temporal and religious matters.

ii. Those who deal with Islamic banks are concerned,inthefirstplace,withobeyingandsatisfyingAllahintheirfinancialandother dealings. So, the information need differs from the traditional banks.

iii. Islamic banks must comply with the principles and rules of Shari’a in all their financialandotherdealings.

iv. The functions of Islamic banks are significantlydifferentfromthoseoftraditional banks.

v. The relationship between Islamic banks and the parties that deal with them differ from the relationship of those who deal with traditional banks.

Islamic Finance Working Group of the Asian-Oceanian Standard-Setters Group (AOSSG), which is led by the MASB, in its 2010 research paperidentifiedtwokeyaccountingprinciplesthatchallengeIFRS-basedfinancialreportingforIslamicfinancialinstruments:(i)thesubstance over form; (ii) and the notion of time value of money.

i. Substance over form

InIFRS-basedfinancialreporting,transactionsare recorded based on their substance and economic reality. The Conceptual Framework of IASB explains, “in assessing whether an itemmeetsthedefinitionofanasset,liabilityor equity, attention needs to be given to its underlying substance and economic reality and not merely its legal form” (Para 4.6). If substance over form applies in recording of Islamicfinancialtransactions,therewillbenolikely difference in the recording of a Shari’a complianttradeorequity-basedfinancingandatraditionalloanfinancing;hence,raisesquestionwhetherIFRS-basedfinancial

reportingcanreflectthetruenatureofIslamicfinancialinstruments.

ii. Time value of money

The notion of effective interest rate applies in IFRS-basedfinancialreportingevenwhenafinancialarrangementisinterest-free;thisisdue to the traditional wisdom of time value of money. For example, in IFRS-based reporting, at initial recognition, receivables from a murabaha deferred payment sale is recorded afterdiscountingfuturecashflowstopresentvalue; the difference between the discounted amount and the nominal value is recorded as interest revenue over the period receivables amountpaysback(IAS18:11).Theconceptof time value of money and application of effective interest rate raises two concerns for Islamicfinancialinstitutions.First,unwindingof receivables discounting imitates traditional interest-basedfinancialarrangementsandresults recognition of notional interest revenue. Second, according to Shari’a, money does not have a time value aside from the value of goods; thus assigning a notional time value for deferredcashflowsconflictstherequisitesofShari’a.

MASBhashadaprojectonIslamicfinancialreporting and geared towards formulation of a separatesetofstandardsforIslamicfinancialinstitutions, but subsequently distanced itself from that objective.

Taking account of the concerns, IASB has set upanIslamicfinanceconsultationgroupin2013tofindwaystoaddressfinancialreportingissuesrelatedtoIslamicfinancialinstruments.However, IASB has yet to come-up with a work plan and timeline addressing its agenda in this regard.

AAOIFI issued twenty-six accounting standards pertaining a number of Islamic financialinstruments.Theaccountingstandards developed by AAOIFI are driven by principles of Shari’a and addresse the disparate natureofIslamicfinancialinstruments.The disclosure requirements stipulated by AAOIFI standards are unique to Islamic financialinstitutionsanditsinstruments,which is absent in IFRS. Nevertheless, AAOIFI standards are not robust and comprehensive enough to deal with every aspect of Islamic banking transactions. Consequently, a recent (2013) survey conducted by Islamic Finance Working Group of AOSSG reveals that in some jurisdictionswhereIslamicfinancialinstitutionsapply AAOIFI accounting standards as primary standards,theyalsoapplyIFRSinfinancialreporting in cases where AAOIFI is silent. Survey respondents from Bahrain, Lebanon, and Oman commented that the traditional financialinstitutionsintheirjurisdictionsapplyIFRS,whereastheIslamicfinancialinstitutions

apply AAOIFI accounting standards. In UAE, though, where IFRS is mandatory, Islamic financialinstitutionscanstillapplyAAOIFIaccounting standards based on permission from regulators.

An earlier survey conducted by AOSSG in 2011, where twenty-four standard-setters from around the world participated, reveals that the Islamic accounting standards applied byIslamicfinancialinstitutionsgloballyarenot homogenous set of standards. Islamic accounting standards in some jurisdictions are similar to IFRS, whereas in some others similar to AAOIFI standards. Some jurisdictions have locally-developed Islamic accounting standards that may or may not be based on AAOIFI standards. Pakistan, for example, developed standard on murabaha independently, but taking AAOIFI standards as a base; whereas it developed the standard on ijara based on IAS 17 Leases. Indonesia, as another example, develops its own Islamic accounting standards, and do not use AAOIFI as a base. The different Islamic accounting standards practiced in different jurisdictions may result markedly different requirements for similar Islamicfinancetransactions.Hence,thekeychallenge remains as to concur on a single set ofhighqualityfinancialreportingstandardstopresentincreasinglycomplexIslamicfinancialinstruments that give a true and fair view by taking account of Shari’a precepts, as well as meet the information needs of the users who are particularly acute on disclosures pertaining Shari’a aspects of the instruments and the Islamicfinancialinstitutionoperation.

The government of Malaysia have been taking initiatives to boost investments in country’s Shari’acomplainantfinancialinstruments.Thisadvances the issue of addressing the peculiarity ofIslamicfinancialinstrumentsinfinancialreporting. A complete and sole adoption of IFRS is not the widely-accepted solution as many argues against its compatibility for Islamic financialinstruments.DevelopingacompleteseparatesetofstandardsforIslamicfinancialinstitutions will require a long span of time, therefore not a practical alternative in the short run. The approach of Bahrain can be a convenient solution at the initial stage; that is to apply AAOIFI accounting standards as the primarysetofstandardsforfinancialreportingofIslamicfinancialinstruments,andapplyIFRS where AAOIFI standards are silent. An alternative way ahead can be development and inclusion of dedicated IFRS implementation guidelines and disclosure requirements for IslamicfinancialinstrumentsandIslamicfinancialinstitutions,sothatthefinancialstatements remain convergent to IFRS, but at the same time avoids criticisms pertaining Shari’a precepts.

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